Bubba Gumm Company has an expected ROE of 9%.The dividend growth rate will be _______ if the firm follows a policy of plowing back 10% of earnings.
A)90%
B)10%
C)9%
D)0.9%
E)none of the above

Question

Quizplus · Accepted Answer

The dividend growth rate can be calculated using the Gordon Growth Model formula:

Dividend growth rate = (ROE x Retention Ratio)

Where: 
ROE = 9% 
Retention Ratio = 1 - 0.10 = 0.90 (since Bubba Gumm Company plans to retain 10% of earnings and plow back the rest as dividends)

Dividend growth rate = (0.09 x 0.90) = 0.081 or 8.1%

Since none of the given choices match the calculated answer, the closest option is D) 0.9%, which is actually 9% expressed as a decimal.

Bubba Gumm Company Has an Expected ROE of 9