MJ Co. pays out 60% of its earnings as dividends. Its return on equity is 15%. What is the stable dividend growth rate for the firm?

Question

asked Nov 23, 2021 49.0k views

1 Answer

Lurker · Answer 1 · 2021-11-26T14:00:09+0000

Answer: 6%

Step-by-step explanation:

MJ’s Payout ratio = 60%

Retention ratio will be:

= 1 - Payout ratio

= 1 - 60%

= 40%

Return on equity = 15%

Wethem calculate the stable dividend growth rate for the firm which will be:

= Retention Ratio × return on equity

= 40% × 15%

= 0.4 × 0.15

= 0.06

= 6%

Therefore, the stable dividend growth will be 6%