Music Doctors Company has an expected ROE of 14%.The dividend growth rate will be ________ if the firm follows a policy of paying 60% of earnings in the form of dividends.

Question

Quizplus · Accepted Answer

Using the dividend growth model, we can solve for the expected growth rate as follows:
Expected ROE = (1 - Dividend Payout Ratio) x (Dividend Growth Rate) + Dividend Payout Ratio
14% = (1 - 0.6) x (Dividend Growth Rate) + 0.6
Dividend Growth Rate = (14% - 0.6) / (1 - 0.6) = 5.6%

Music Doctors Company Has an Expected ROE of 14