Question

In: Finance

You have run a regression of payout ratios against expected growth and risk (beta) for all companies in the market and arrived at the following equation:

You have run a regression of payout ratios against expected growth and risk (beta) for all companies in the market and arrived at the following equation:

Payout ratio = 0.80 1.2 (Expected growth) - .25 (Beta)

Using this regression, estimate the payout ratio for a firm with an expected growth rate of 20% and a beta of 1.2.

a. 0%

b. 26%

c. 50%

d. 56%

e. 80%

Solutions

Expert Solution

The option "(b) = 26%" is right option.

 

Explanation:

 

Payout ratio = .80 - 1.2*Expected growth - 0.25*Beta

 

Expected growth = .20

Beta = 1.2

Payout = 0.80 - 1.2*.20 - .25*1.2 

              =. .80-.24-.3 

              = .26 or 26%

 

Hence, the option (b) Payout ratio = 26%, is right option.

Payout ratio = 26%

Junaid answered 1 year ago
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