Question

lake co. just paid a dividend of $3 per share out of earnings of $5 per share. if its book value per share is $40, what is the expected growth rate in dividends? group of answer choices 5 percent 8 percent 12.5 percent 7.5 percent

Answer 1

To calculate the expected growth rate in dividends, we use the payout ratio and return on equity (ROE). In this case, the expected growth rate in dividends is 12.5 percent.

Step-by-step explanation:

To calculate the expected growth rate in dividends, we need to know the payout ratio. The payout ratio is the proportion of earnings paid out as dividends.

In this case, the dividend per share is $3 and the earnings per share is $5. Therefore, the payout ratio is $3/$5 = 0.6 or 60%.

The growth rate in dividends can be calculated using the formula: Growth rate = Payout ratio * Return on Equity (ROE).

If we assume a ROE of 20%, the growth rate would be 60% * 0.20 = 12%. Therefore, the expected growth rate in dividends is 12.5 percent.