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.)

Plowback ratio____%

Answer 1

The plowback ratio for Hornberger Incorporated can be calculated by using the formula B = 1 - Dividend Payout Ratio. With an ROE of 11.80% and a dividend growth rate of 2%, the plowback ratio works out to be approximately 16.95%.

Step-by-step explanation:

The question is asking us to calculate the plowback ratio, which represents the proportion of earnings Hornberger Incorporated retains and reinvests in the firm, as opposed to distributing as dividends to shareholders. To find this, we need to use the formula for the plowback ratio: B = 1 - Dividend Payout Ratio.

Given the current dividend of $2.00 and an expected increase to $2.04, we can calculate the dividend growth rate, which is $2.04 / $2.00 - 1 = 0.02 or 2%. The return on equity (ROE) is provided as 11.80%, which can also be expressed as the growth rate (g) divided by the plowback ratio (B), or g = ROE × B. Rearranging the formula and solving for B gives us B = g / ROE. Inserting the values we have, we get B = 0.02 / 0.118 = 0.16949, which we can multiply by 100 to express it as a percentage: 16.95%. Hence, Hornberger plows back 16.95% of its earnings into the firm. Remember to round to two decimal places as instructed for the final answer.