Assuming that the dividend payout ratio is 0.4, net income is 100, net sales are 400, and the equity is 500, what is the growth rate of earnings of the firm?
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A. B. C. D. E.B
The growth rate of earnings of the firm is equal to the retention rate multiplied by the return on equity (ROE). The retention rate is equal to one minus the dividend payout ratio (1 - 0.4 = 0.6). ROE is equal to net income divided by equity (100/500 = 0.2). The growth rate is 0.6 x 0.2 = 0.12 = 12%.