The company maintains a 60% dividend ratio and the share price is currently $ 50.
growth rate "g": ROE(1 - payout ratio)
g = 0.15(1 - 0.60) = 0.06
$50 = $5(0.60) / ( r - 0.06)
$50 = $3 / (r - 0.06)
3 / 50 = r - 0.06
0.06 = r - 0.06
r = 0.12
Then the ROE changes....let x stand for payout ratio
$100 = $5x / (0.12 - (0.40(1 - x))
x = 0.8, or 80%
Dividend/payout ration is calculated same way as DPS/EPS and growth should be calculated taking capital gain into account.
Having some trouble with this question
A company has invested in projects with an ROE of 15% and expects an EPS of $ 5 next year.
The company maintains a 60% dividend ratio and the share price is currently $ 50.
The company decides to change its dividend policy and invest in new projects with an ROE of 40%.
As a result of implementing these decisions, the company’s share price jumps to $ 100.
Assuming that there has been no change in the EPS and the rate of return expected by investors remains the same, what is the new dividend ratio ?
I understand r remains the same but I'm unsure how to work out the new growth when the ploughback/retention ratio is unknown?
