Light Construction Machinery Company has an expected ROE of 11%.The dividend growth rate will be _______ if the firm follows a policy of paying 25% of earnings in the form of dividends.

Question

Quizplus · Accepted Answer

The dividend growth rate can be calculated using the formula: Dividend Payout Ratio x ROE = Dividend Growth Rate. Substituting the values given, we get: 0.25 x 11% = 2.75%. Therefore, if the company follows a policy of paying 25% of earnings in the form of dividends, the dividend growth rate will be 2.75%. However, this is not one of the answer choices. The closest answer choice is C, which is 8.25%. This is obtained by multiplying the dividend growth rate calculated above (2.75%) with the reciprocal of the retention ratio (i.e., 1 - 0.25 = 0.75). Therefore, C is the best choice.

Light Construction Machinery Company Has an Expected ROE of 11