Question

Dishwasher’s Delights plows back 70.00% of its earnings to take on projects that earn the firm a rate of return of 14.00%. Dishwasher’s stockholders require a return of 13.50% on their common stock. Earnings per share are expected to be $6.00 next year. a. What is the expected growth rate for Dishwasher’s common stock?

Answer 1

Answer:

= 9.80%

Explanation:

Plowback ratio fundamental analysis ratio that measures how much earnings are retained after dividends are paid out.

The expected growth rate equals the return on equity times the plowback ratio:  

We can use the relationship g = ROE × b to find the plowback ratio.

= 14.00% × 0.70 = 9.80%

Answer 2

Answer:

The growth rate in dishwashers common stock is 9.8%

Explanation:

The growth rate can be calculated by multiplying the company's ROE by the Retention Ratio commonly denoted as b

The retention ratio is given as 70%(plow back)

And we are told that the firm earns 14 % from projects taken using earnings

g = ROE * b

   = 14% * 70%

    =9.8%