1. Moderate Growth Company paid a dividend last year of $2.10. The expected ROE for next...
1. Moderate Growth Company paid a dividend last year of $2.10. The expected ROE for next year is 13%. An appropriate required return on the stock is 11%.
If the firm has a plowback ratio of 63%, what should the dividend in the coming year be?
Homework Answers
Dividend last year, D0 = $ 2.10
Plow back ratio(Retention ratio) = 63%
Dividend payout ratio = 1- plow back ratio =1- 63% = 37%
37% * EPS = 2.10
EPS last year = 2.1/37% = $ 5.67
Dividend next year = D0*(1+g) where g is the sustainable growth rate
g = ROE * Retention ratio
g = 13% * 0.63 = 8.19%
D1 = 2.10*(1+8.19%) = $ 2.27
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