Asked by Hudson Nyaki on Jun 01, 2024
Verified
Eagle Brand Arrowheads has expected earnings of $1.25 per share and a market capitalization rate of 12%. Earnings are expected to grow at 5% per year indefinitely. The firm has a 40% plowback ratio. By how much does the firm's ROE exceed the market capitalization rate?
A) .5%
B) 1%
C) 1.5%
D) 2%
Plowback Ratio
A metric indicating the proportion of earnings retained by a company for reinvestment in its operations, rather than distributed to shareholders as dividends.
- Assess the consequences of dividend policy adjustments on the market value of shares and the financial outcomes for shareholders.
Verified Answer
ZK
Zybrea KnightJun 04, 2024
Final Answer :
A
Explanation :
ROE = g/b = 0.05/0.4 = 12.5%; k is given as 12%, so ROE − k = 0.5%
Learning Objectives
- Assess the consequences of dividend policy adjustments on the market value of shares and the financial outcomes for shareholders.