Acme Consolidated has a return on equity of 12%. If Acme distributes 60% of earnings as dividends, then we would expect the common shareholders' investment in the firm and the value of the common stock to grow by
A) 4.80%.
B) 7.20%.
C) 12%.
D) 6%.

Question

Quizplus · Accepted Answer

Acme Consolidated has a return on equity of 12%. If Acme distributes 60% of earnings as dividends, then the common shareholders' investment in the firm and the value of the common stock will grow by 4.80%. This is because the retained earnings, which are 40% of earnings, will be reinvested in the firm and will earn a return of 12%. This will increase the value of the common stock by 4.80%.

Acme Consolidated Has a Return on Equity of 12