Expected Annual Growth Rate of Dividends | CFA Level 1 Exam Question

Expected Annual Growth Rate of Dividends

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Question

A firm has a dividend payout ratio of 70% and it earns a 10% per year return on its equity. Calculate the expected annual growth rate of the firm's dividends?

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A. B. C. D.

D

g=(RR)(ROE)=0.3*0.10=3%.

To calculate the expected annual growth rate of the firm's dividends, we can use the formula:

Growth rate = Dividend payout ratio × Return on equity

In this case, the dividend payout ratio is given as 70% and the return on equity is 10% per year. Substituting these values into the formula, we have:

Growth rate = 0.70 × 0.10 = 0.07 or 7%

Therefore, the expected annual growth rate of the firm's dividends is 7%.

The correct answer is B. 7%.

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