Final answer:
The growth rate of future dividends is expected to be 2.958% per year assuming the firm maintains its current reinvestment policy and that the expected return on new projects is correctly interpreted as 9.86% rather than 986%.
Step-by-step explanation:
To calculate the growth rate of future dividends considering the earnings per share (EPS), dividend payout ratio, and expected return on new projects, we use the formula for the sustainable growth rate (SGR). SGR is calculated as the Return on Equity (ROE) multiplied by the retention ratio (1 - dividend payout ratio). In this case, ROE is synonymous with the expected return on new projects if equity is the only source of financing for those projects. With an EPS of $2.33, a dividend payout ratio of 0.7, and an expected return on projects of 986%, this information can be used to solve for the growth rate of future dividends.
The retention ratio is 1 - 0.7 = 0.3. Applying the expected return, we have: Growth Rate = 0.3 × 986% = 295.8%. Since growth rates higher than 100% are normally not sustainable or realistic in a business context, it's probable that the 'expected return on new projects' figure provided (986%) was intended to be 9.86% (or 0.0986 in decimal form).
Using the corrected rate, the calculation for growth would then be: Growth Rate = 0.3 × 0.0986 = 0.02958, or 2.958% when expressed as a percentage. Therefore, as long as the firm maintains its current reinvestment policy, the future dividends are expected to grow at 2.958% per year.