Question

hornberger, incorporated recently paid a dividend of $2.00 per share. the next dividend is expected to be $2.04 per share. hornberger has a return on equity of 11.80%. what percentage of its earnings does hornberger plow back into the firm? (do not round intermediate calculations. round your answer to 2 decimal places.)

Answer 1

The percentage of earnings that Hornberger, Incorporated plows back into the firm, calculated as the retention ratio, is 16.95% after rounding to two decimal places.

Step-by-step explanation:

The student has asked to calculate the percentage of earnings that Hornberger, Incorporated plows back into the firm. To solve this, we need to find the retention ratio, which is the portion of earnings retained after dividends are paid.

This ratio can be found by subtracting the payout ratio (dividends divided by earnings) from 1. Since Hornberger has a return on equity (ROE) of 11.80% and the dividend growth is from $2.00 to $2.04, we can derive earnings per share (EPS) based on the dividend growth rate and ROE. The dividend growth rate is ($2.04 - $2.00) / $2.00 = 0.02 or 2%. Assuming all else remains consistent, the retention ratio (b) can be calculated using the formula b = g / ROE, where g is the growth rate. Therefore, b = 0.02 / 0.118 = 0.16949, or 16.95% when rounded to two decimal places.