A portfolio manager with Mally, Feasance, & Company is examining shares of Allcycles.com. Assume the following information:
Annual Dividend: $0.45 -
EPS: $2.15 -
Tax Rate: 35%
Discount Rate: 12.25%
ROE: 18%
Using this information, and assuming that ROE is expected to remain stable, what is the dividend growth rate for Clay Industries?
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A. B. C. D. E. F.F
To calculate the growth rate, use the following equation: {g = ROE(1 - Dividend Payout Ratio)}.
While the ROE figure has been provided, the Dividend Payout Ratio must be calculated manually. To find the Dividend Payout Ratio, divide the annual dividend by the EPS figure, giving the following:
{Dividend Payout Ratio = ($0.45/$2.15)}
From this equation, we determine that the Dividend Payout Ratio for this firm is 20.93%. Inputting this figure into the growth rate equation will yield a dividend growth rate of 14.23% for this firm.
As you can see, tax rates and discount rates are not factored into the calculation.