A firm has a return on equity of 14% and a dividend payout ratio of 60%.The firm's anticipated growth rate is _________.
A)5.6%
B)10%
C)14%
D)20%
E)none of the above

Question

Quizplus · Accepted Answer

To calculate the anticipated growth rate, we can use the Gordon Growth Model:

anticipated growth rate = (return on equity × (1 - dividend payout ratio))

Substituting the given values in the formula, we get:

anticipated growth rate = (14% × (1 - 60%))
anticipated growth rate = (0.14 × 0.4)
anticipated growth rate = 0.056 or 5.6%

Therefore, the anticipated growth rate of the firm is 5.6%. The correct answer is A) 5.6%.

A Firm Has a Return on Equity of 14% and a Dividend