Asked by Brayan Patlan on May 22, 2024
Verified
Toria Corp has an expected ROE of 15%. The dividend growth rate will be _______ if the firm follows a policy of plowing back 75% of earnings.
A) 3.75%
B) 11.25%
C) 8.25%
D) 15.0%
ROE
Return on Equity, a measure of financial performance calculated by dividing net income by shareholders' equity, indicating how effectively management is using a company’s assets to create profits.
Dividend Growth Rate
The annualized percentage rate of growth of a company's dividend payments to shareholders.
Plowing Back
The reinvestment of earnings by a company back into its business rather than distributing them as dividends to shareholders.
- Ascertain and measure the rates at which dividends grow by leveraging plowback ratios and return on equity (ROE).
Verified Answer
LD
Logan DavisMay 24, 2024
Final Answer :
B
Explanation :
The dividend growth rate can be calculated using the formula for sustainable growth rate, which is ROE * (1 - dividend payout ratio). Given an ROE of 15% and a plowback ratio (1 - dividend payout ratio) of 75%, the dividend growth rate is 15% * 0.75 = 11.25%.
Learning Objectives
- Ascertain and measure the rates at which dividends grow by leveraging plowback ratios and return on equity (ROE).