A stock's P/E ratio is 10.4, with an expected return on equity of 14% and a dividend growth rate of 5.7%. The firm's dividend payout ratio equals ________.
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A. B. C. D.C
Po/E1 = dividend payout/(k - g)
Therefore, 10.4 = dividend payout /(0.14 - 0.057), giving dividend payout = 86.32%.
To determine the dividend payout ratio, we need to use the information provided, specifically the P/E ratio, expected return on equity, and dividend growth rate.
The P/E ratio (Price-to-Earnings ratio) is calculated by dividing the market price per share by the earnings per share (EPS). In this case, the P/E ratio is given as 10.4.
The formula for the P/E ratio is: P/E ratio = Market Price per Share / Earnings per Share
Since we are given the P/E ratio, we can rearrange the formula to solve for the earnings per share (EPS): Earnings per Share = Market Price per Share / P/E ratio
Next, we are given the expected return on equity (ROE) as 14%. ROE is a measure of profitability and represents the return generated on shareholders' equity. The formula for ROE is: ROE = Net Income / Shareholders' Equity
Since the expected return on equity is given, we can rearrange the formula to solve for net income: Net Income = ROE * Shareholders' Equity
Now, we need to calculate the dividend growth rate. The dividend growth rate represents the rate at which the company's dividends are expected to grow over time. In this case, the dividend growth rate is given as 5.7%.
Finally, we can calculate the dividend payout ratio. The dividend payout ratio is the percentage of earnings that is paid out as dividends to shareholders. It is calculated as follows: Dividend Payout Ratio = Dividends / Earnings
To calculate the dividend payout ratio, we need to determine the dividends and earnings.
The dividends can be calculated using the dividend growth rate and the expected return on equity: Dividends = Net Income * Dividend Growth Rate
We already calculated net income using the expected return on equity and shareholders' equity.
Now, we can substitute the values into the dividend payout ratio formula: Dividend Payout Ratio = (Net Income * Dividend Growth Rate) / Net Income
Simplifying the equation: Dividend Payout Ratio = Dividend Growth Rate
From the given information, the dividend growth rate is 5.7%.
Therefore, the answer is: Dividend Payout Ratio = 5.7%
None of the provided answer options match the calculated result of 5.7%. It seems there may be an error in the options or question.