Given that the required rate of return on a common stock is 17%, the dividend growth rate is 13%, and the P/E ratio is 17, what is the expected dividend payout ratio?
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A. B. C. D. E.E
The infinite period Dividend Discount Model claims that the current price of a common stock is equal to D1 / (k - g), where D1 is next period's (most often next year's) dividend, k is the required rate of return, and g is the growth rate of dividends. The earnings multiplier model goes a step further by dividing both sides of the infinite period Dividend Discount Model equation by expected earnings during the next 12 months, yielding P/E = (D1/E) / (k - g). Rearranging this results in D1/E = (P/E) x (k - g). In this question, the expected dividend payout ratio is equal to 17 x (0.17 - 0.13) =
0.68.