Firm's Return on Equity Calculation

Firm's Return on Equity Calculation

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Question

A firm has a dividend growth rate of 2.8%. It typically pays out 48% of its earnings as dividends. Recently, it paid out $2.4 per share dividend and the required rate of return on its stock is 13%. The firm's return on equity equals ________.

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Explanations

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A. B. C. D.

B

g = ROE*(1 - dividend payout ratio). Therefore, ROE = 0.028/(1 - 0.48) = 5.38%.

To find the return on equity (ROE), we need to use the dividend growth model and the payout ratio.

The dividend growth model is given by the formula:

ROE = (Dividend per share / Price per share) + Dividend growth rate

We are given the dividend growth rate as 2.8% and the dividend per share as $2.4. However, we don't have the price per share, which is necessary to calculate the ROE using this formula. Therefore, the information provided is insufficient to calculate the return on equity.

The correct answer is (C) insufficient information.

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