Question

Firm B has a 12% ROE. Other things held constant, what would its expected growth rate be if it paid out 25% of its earnings as dividends?

Answer 1

the expected growth rate is 9%

Step-by-step explanation:

The computation of the expected growth rate is shown below:

As we know that

Retention ratio = (1 - dividend payout ratio)

So,

Retention ratio = (1 -0.25) = 0.75

Now

Growth rate = Retention ratio × ROE

= 0.75 × 12

= 9%

hence, the expected growth rate is 9%

We simply applied the above formula so that the correct value could come

And, the same is to be considered