Question

High Tech Chip Company is expected to have EPS in the coming year of $2.50. The expected ROE is 12.5%. An appropriate required return on the stock is 11%. If the firm has a plowback ratio of 70%, the growth rate of dividends should be

Answer 1

In this case, the growth rate of dividends should be 0.6875%. This is calculated as follows:

Required return on the stock = 11% Expected return on equity = 12.5%

Growth rate = (Expected return on equity - Required return on the stock) * Plowback Ratio

Growth rate = (12.5% - 11%) * 0.7 Growth rate = 0.6875%