CFA Level 1: Expected Dividend Growth Rate

Expected Dividend Growth Rate

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Question

ABC (a large manufacturer of farm equipment) is a stable company reporting the following financial information:

Earnings per share $1.50 -

Dividends per share $0.50 -

Net Income $12 million -

Equity $50 million -

Given the above information, calculate the company's expected dividend growth rate.

Answers

Explanations

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A. B. C. D. E. F.

Explanation

The expected dividend growth rate = (Retention Rate) x (Return on Equity). Retention Rate = 1 - Payout Rate. Return on Equity = NI/E. Thus in this case the expected dividend growth rate = 1 - (.5/1.5) x ($12 million/$50 million) = (1 - .33) x (.24) = .16 or 16%.

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