Salted Chips Company paid a dividend last year of $2.50. The expected ROE for next year is 12.5%. An appropriate required return on the stock is 11%. If the firm has a plowback ratio of 60%, the dividend in the coming year should be

Question

Quizplus · Accepted Answer

The dividend next year can be calculated using the formula for dividend growth, which incorporates the plowback ratio (b) and the return on equity (ROE). The growth rate (g) is b * ROE = 0.60 * 12.5% = 7.5%. The expected dividend next year is then last year's dividend * (1 + g) = $2.50 * (1 + 0.075) = $2.6875, which rounds to $2.69, making option C correct.

Salted Chips Company Paid a Dividend Last Year of $2