Asked by Giovanni Figueroa on Apr 27, 2024
Verified
Juice & Fruit Corp has an expected ROE of 9%. The dividend growth rate will be _______ if the firm follows a policy of plowing back 10% of earnings.
A) 90%
B) 10%
C) 9%
D) 0.9%
ROE
Return on Equity, a measure of financial performance calculated by dividing net income by shareholders' equity, indicating how effectively a company uses investments to generate earnings growth.
Dividend Growth Rate
The annual percentage rate at which a company's dividend payments to shareholders increase.
Plowing Back
Refers to the strategy of reinvesting profits back into the business instead of distributing them as dividends.
- Evaluate and quantify the acceleration in dividend yields factoring in plowback ratios and return on equity (ROE).
Verified Answer
MS
Marcus SparksApr 27, 2024
Final Answer :
D
Explanation :
The dividend growth rate can be calculated using the formula for sustainable growth rate, which is ROE * b, where b is the retention ratio (plowback ratio). Here, ROE is 9% and the plowback ratio is 10% (0.10), so the growth rate is 9% * 0.10 = 0.9%.
Learning Objectives
- Evaluate and quantify the acceleration in dividend yields factoring in plowback ratios and return on equity (ROE).