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The Shamrock Dogfood Company (SDC) has consistently paid out 40 percent of its earnings in dividends....

The Shamrock Dogfood Company (SDC) has consistently paid out 40 percent of its earnings in dividends. The company's return on equity is 14 percent. Do not round intermediate calculations. Round your answers to two decimal places.

What would you estimate as its dividend growth rate? %

If you found out that the company was only growing at 2 percent, how much could the company afford to pay out? %

Solutions

Expert Solution

a. Growth rate = ROE * Retention ratio = 0.14 * (1 - 0.40) = 0.0840 or 8.40%

b. Growth rate = ROE * Retention ratio

0.02 = 0.14 * Retention ratio

Retention ratio = 0.02 / 0.14

Retention ratio = 0.1429 or 14.29%

Payout ratio = 100% - 14.29%

Payout ratio = 85.71%

jeff jeffy answered 2 years ago
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