Estimate the dividend growth for a company that exhibits the following characteristics:
Retention rate 75%
Payout rate 25%
Return on Equity (ROE) 20%
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A. B. C. D. E. F.A
The estimated growth rate of dividends = (Retention Rate) x (Return on Equity). In this case the estimated growth rate of dividends = 75% x 20% = 15%.
To estimate the dividend growth for a company, we need to consider the retention rate, payout rate, and return on equity (ROE).
The retention rate is the percentage of earnings that a company retains and reinvests back into the business rather than distributing it as dividends. In this case, the retention rate is 75% (0.75), which means that the company retains 75% of its earnings.
The payout rate is the percentage of earnings that a company distributes as dividends to its shareholders. In this case, the payout rate is 25% (0.25), which means that the company pays out 25% of its earnings as dividends.
The return on equity (ROE) is a measure of a company's profitability and efficiency in generating profits from shareholders' equity. In this case, the ROE is 20% (0.20), which means that the company generates a 20% return on its shareholders' equity.
To estimate the dividend growth, we can use the sustainable growth rate formula, which is the product of the retention rate and the return on equity:
Dividend Growth Rate = Retention Rate * Return on Equity
Dividend Growth Rate = 0.75 * 0.20
Dividend Growth Rate = 0.15 or 15%
Therefore, the estimated dividend growth rate for the company is 15%.
Among the given options, the closest answer is A. 15%.