Think Tank Company has an expected ROE of 26%.The dividend growth rate will be _______ if the firm follows a policy of plowing back 90% of earnings.
A)2.6%
B)10%
C)23.4%
D)90%
E)none of the above

Question

Quizplus · Accepted Answer

If the firm follows a policy of plowing back 90% of earnings, it will pay out only 10% of earnings as dividends. The dividend growth rate can be calculated using the Gordon growth model:
g = ROE x retention rate
g = 26% x 90%
g = 23.4%
Therefore, the dividend growth rate will be 23.4%.

Think Tank Company Has an Expected ROE of 26