Suppose a firm has been earning a return on equity (ROE) of 12 percent and retai

Question

Suppose a firm has been earning a return on equity (ROE) of 12 percent and retaining 70 percent of its earnings (i.e. its dividend payout ratio is 30 percent). If this situation is expected to continue indefinitely, what would be a reasonable estimate of g, the company’s future growth rate in dividends?

Suppose a firm has been earning a return on equity (ROE) of 12 percent and retaining 70 percent of its earnings (i.e. its dividend payout ratio is 30 percent). If this situation is expected to continue indefinitely, what would be a reasonable estimate of g, the company’s future growth rate in dividends?

Explanation / Answer

growth rate= return on equity *Retention ratio

which is equal to

=(0.12*0.7)

=8.4%

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