Ocean Co. just paid a dividend of $2 per share out of earnings of $4 per share. If the book value per share is $25, what is the expected growth rate in dividends (g)?

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Quizplus · Accepted Answer

The expected growth rate in dividends (g) can be calculated using the retention ratio (b) and the return on equity (ROE). The retention ratio is the portion of earnings not paid out as dividends, which can be calculated as 1 - (Dividends / Earnings) = 1 - ($2 / $4) = 0.5. The ROE can be calculated as Earnings / Book Value per Share = $4 / $25 = 0.16 or 16%. The growth rate (g) is then b * ROE = 0.5 * 16% = 8%.

Ocean Co Just Paid a Dividend of $2 Per Share Out