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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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  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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