Expected Dividend Growth Rate Calculation | Dwight and Clark Financial Analysis

Expected Dividend Growth Rate Calculation

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Question

Dwight and Clark (a large manufacturing firm) is a stable company reporting the following financial information:

Earnings per share $1.50 -

Dividends per share $0.30 -

Net Income $10 million -

Equity $50 million -

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

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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 - (.3/1.5) x ($10 million/$50 million) = (1 - .2) x (.2) = .16 or 16%.

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