Stockholders of Dogs R Us Pet Supply expect a 12% rate of return on their stock. Management has consistently been generating an ROE of 15% over the last 5 years but now believes that ROE will be 12% for the next 5 years. Given this, the firm's optimal dividend payout ratio is now ________.

Question

Quizplus · Accepted Answer

When the rate of return on equity (ROE) equals the rate of return expected by stockholders, the firm should distribute all of its earnings as dividends to meet the stockholders' expected rate of return. Hence, the optimal dividend payout ratio is 100%.

Stockholders of Dogs R Us Pet Supply Expect a 12