Which equation is valid?
A) g = Percent of earnings retained ÷ Return on equity
B) g = Return on equity ÷ Percent of earnings retained
C) g = Return on equity ÷ Return on total assets
D) g = Percent of earnings retained x Return on equity
E) g = Total assets x Return on total assets

Question

Quizplus · Accepted Answer

This formula is known as the Gordon Growth Model and it calculates the expected growth rate of a company's dividends. It is based on the assumption that a company's stock price is directly related to its expected future dividends. Therefore, the growth rate (g) is equal to the percentage of earnings retained (1 - payout ratio) multiplied by the return on equity (ROE).

Which Equation Is Valid