Expected Annual Growth Rate of Firm's Dividend | CFA Level 1 Exam Preparation

Calculate the Expected Annual Growth Rate of a Firm's Dividend

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Question

A firm has an earnings retention rate of 35% and it earns a 12% per year return on its equity. Calculate the expected annual growth rate of the firm's dividend?

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A. B. C. D.

B

g=(RR)(ROE)=0.35*0.12=4.2%.

To calculate the expected annual growth rate of the firm's dividend, we need to use the formula:

Expected Dividend Growth Rate = Earnings Retention Rate × Return on Equity

In this case, the earnings retention rate is given as 35% (0.35) and the return on equity is 12% (0.12).

Expected Dividend Growth Rate = 0.35 × 0.12

Expected Dividend Growth Rate = 0.042 or 4.2%

Therefore, the expected annual growth rate of the firm's dividend is 4.2%.

The correct answer is B. 4.2%.

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