Dishwasher's Delights plows back 70.00% of its earnings to take on projects that earn the firm a rate of return of 14.00%. Dishwasher's stockholders require a return of 13.50% on their common stock. Earnings per share are expected to be $6.00 next year. a. What is the expected growth rate for Dishwasher's common stock?

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1 June, 04:36

Dishwasher's Delights plows back 70.00% of its earnings to take on projects that earn the firm a rate of return of 14.00%. Dishwasher's stockholders require a return of 13.50% on their common stock. Earnings per share are expected to be $6.00 next year. a. What is the expected growth rate for Dishwasher's common stock?

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Answers (2)

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Sydney Wagner · Answer 1

The growth rate in dishwashers common stock is 9.8%

Explanation:

The growth rate can be calculated by multiplying the company's ROE by the Retention Ratio commonly denoted as b

The retention ratio is given as 70% (plow back)

And we are told that the firm earns 14 % from projects taken using earnings

g = ROE * b

= 14% * 70%

=9.8%

Elle Burch · Answer 2

= 9.80%

Explanation:

Plowback ratio fundamental analysis ratio that measures how much earnings are retained after dividends are paid out.

The expected growth rate equals the return on equity times the plowback ratio:

We can use the relationship g = ROE * b to find the plowback ratio.

= 14.00% * 0.70 = 9.80%