Which of the following statements about the equity growth rate is correct?

I. The higher the ROCE the higher equity growth rate, all other things equal.
II. The higher the dividend payout the higher the equity growth rate.
III. The equity growth rate is unaffected by the cost of debt.
IV. The equity growth rate indicates the expected growth in stock price each period.

Question

Which of the following statements about the equity growth rate is correct?

I. The higher the ROCE the higher equity growth rate, all other things equal.
II. The higher the dividend payout the higher the equity growth rate.
III. The equity growth rate is unaffected by the cost of debt.
IV. The equity growth rate indicates the expected growth in stock price each period.

Quizplus · Accepted Answer

The equity growth rate is primarily influenced by the Return on Capital Employed (ROCE) because it indicates how efficiently a company is using its capital to generate profits, which can be reinvested to grow equity. Higher dividend payouts actually reduce the amount of earnings that can be reinvested into the company, potentially lowering the equity growth rate. The cost of debt affects the company's overall cost of capital but does not directly influence the equity growth rate. Lastly, the equity growth rate does not directly indicate the expected growth in stock price each period, as stock prices are influenced by a variety of factors beyond just the equity growth rate.

Which of the Following Statements About the Equity Growth Rate