The Shamrock Dogfood Company (SDC) has consistently paid out 40 percent of its earnings in dividends. The company's return on equity is 16 percent.
a. What would you estimate as its dividend growth rate?
Dividend payout ratio 40%
Return on equity 16%
Growth rate = (Retention rate) * (Return on equity)
= (1-payout ratio) * (Return on equity)
= (1-.40) * (.16)
= .60 * .16
= 9.6%
b. If you found out that the company was only growing at 2 percent, how much could the company afford to pay out?