Final answer:
The firm's dividend is calculated using its EPS of $2.21 and retention rate of 0.6. By finding 1 - retention rate, we get the dividend payout rate of 0.4. Multiplying this rate by the EPS gives a dividend of $0.884, which rounds to $0.88.
Step-by-step explanation:
The firm's dividend can be calculated by first determining the portion of earnings that is paid out as dividends through the retention rate. The retention rate of 0.6 implies that 60% of the earnings per share (EPS) are retained in the company, hence, 40% are paid out as dividends. The calculation for the dividend is as follows:
- Earnings Per Share (EPS) = $2.21
- Retention Rate (rr) = 0.6
- Dividend Payout Rate = 1 - rr = 1 - 0.6 = 0.4
- Dividend = EPS × Dividend Payout Rate
- Dividend = $2.21 × 0.4 = $0.884
Therefore, the dividend is $0.88 when rounded to the nearest penny.