Question

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?

Answer 1

Answer: 6%

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%