A firm has a dividend payout ratio of 60%, and earns a 10% per year return on its equity. Calculate the expected annual growth rate of the firm's dividends.
Click on the arrows to vote for the correct answer
A. B. C. D.D
g=(RR)(ROE)=0.4*0.10.
To calculate the expected annual growth rate of the firm's dividends, we need to use the dividend payout ratio and the return on equity.
The dividend payout ratio is the proportion of earnings that the firm pays out as dividends to its shareholders. In this case, the dividend payout ratio is given as 60%.
The return on equity (ROE) is the profitability measure that indicates how effectively the firm generates profits from the shareholders' equity. In this case, the firm earns a 10% per year return on its equity.
The growth rate of dividends can be calculated using the following formula:
Dividend Growth Rate = Dividend Payout Ratio × Return on Equity
Substituting the given values into the formula:
Dividend Growth Rate = 0.60 × 0.10 = 0.06 or 6%
Therefore, the expected annual growth rate of the firm's dividends is 6%.
Based on the available answer choices, none of them match the calculated growth rate of 6%. The correct answer is not provided in the given options (B. Not able to compute with the above data).