Asked by Christopher Robin on May 12, 2024
Verified
Shark Tank Corp has an expected ROE of 26%. The dividend growth rate will be _______ if the firm follows a policy of plowing back 90% of earnings.
A) 2.6%
B) 10%
C) 23.4%
D) 90%
Plowing Back
The reinvestment of earnings by a company back into its own operation or projects, also known as retained earnings.
ROE
Return on Equity, a financial ratio that measures the profitability of a business in relation to shareholder’s equity, indicating how well a company uses investments to generate earnings growth.
Dividend Growth Rate
The annualized percentage rate of growth of a company's dividend payments.
- Comprehend how dividend policy influences dividend growth rate and the valuation of a firm.
Verified Answer
MT
Megha TripathiMay 17, 2024
Final Answer :
C
Explanation :
The dividend growth rate can be calculated using the formula for sustainable growth rate (SGR), which is ROE * (1 - dividend payout ratio). Given an ROE of 26% and a plowback ratio (1 - dividend payout ratio) of 90%, the growth rate is 26% * 90% = 23.4%.
Learning Objectives
- Comprehend how dividend policy influences dividend growth rate and the valuation of a firm.