Assume a company's retention rate is 60 percent, its cost of equity capital is 10 percent, its forecasted earnings per share are $3.00, and its ROE is 12 percent. The company's dividend next period is closest to:

Question

Quizplus · Accepted Answer

The dividend next period can be calculated using the formula for dividends based on the retention rate (b), earnings per share (EPS), and return on equity (ROE). The retention rate is 40% (100% - 60%), so the payout ratio is 60%. The dividend is therefore 60% of the forecasted earnings per share of $3.00, which equals $1.80. However, the correct calculation for the dividend next period should consider the given information correctly. The mistake in the explanation points to a calculation error. Given the retention rate (b) is 40% (100% - 60%), the dividend payout ratio is indeed 60%. However, the correct interpretation should lead to the calculation of dividends paid out, not retained earnings. The correct calculation for the dividend next period is actually based on the payout ratio directly from the earnings, which is $3.00 * 40% (retention rate) = $1.20, aligning with option B. The initial explanation mistakenly applied the payout ratio instead of the retention rate for the calculation.

Assume a Company's Retention Rate Is 60 Percent, Its Cost