A firm has a return on equity of 20% and a dividend payout ratio of 30%.The firm's anticipated growth rate is _______.

Question

Quizplus · Accepted Answer

The dividend payout ratio is the proportion of earnings paid out as dividends. Therefore, if the firm has a 30% payout ratio, it is retaining 70% of its earnings. The retention ratio is 1 - dividend payout ratio = 1 - 0.3 = 0.7.

The formula for calculating the sustainable growth rate (SGR) is:

SGR = ROE x retention ratio

Given that the ROE is 20% and the retention ratio is 0.7, the SGR can be calculated as:

SGR = 20% x 0.7 = 14%

Therefore, the anticipated growth rate for the firm is 14%.

A Firm Has a Return on Equity of 20% and a Dividend