 Business
30 March, 04:59

# You expect ZOZO Inc. will have earnings per share of \$3 this year and expect that they will pay out \$1.50 of these earnings to shareholders in the form of a dividend. ZOZO's return on new investments is 15% and their equity cost of capital is 12%. The expected growth rate for ZOZO's dividends is closest to:

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Answers (1)
1. 30 March, 06:10
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Dividend pay-out ratio = \$1.50/\$3 x 100 = 50%

Retention rate (b) = 50% = 0.5

Return on new investment (r) = 15% = 0.15

Growth rate = retention rate x return on new investment

Growth rate = 0.5 x 0.15

Growth rate = 0.075 = 7.5%

Explanation:

Since the dividend pay-out ratio is 50%, it implies that retention rate is 50%. Return on new investment is 15%. Growth rate is the product of retention rate and return on new investment.
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