Question

Arts and Crafts Inc. will pay a dividend of $5 per share in 1 year. It sells at $50 a share, and firms in the same industry provide an expected rate of return of 14%. What must be the expected growth rate of the company’s dividends?

Answer 1

Answer: 12.6 %

Explanation: The rate of growth that a company expects to maintain for a long term is called sustainable growth rate. It is denoted by G. Sustainable

growth rate helps the analysts to determine at what stage the company is in its life cycle.

.

FORMULA :-

GROWTH = Retention ratio *  return on equity

                 = ( 1 - Dividend payout ratio) * return on equity

                 $= (1-\frac{5}{50} \%) * 14 \%$

                 = 0.9 * 0.14

                = 12.6 %