Question

What is the expected return if a firm has a payout ratio of 0.4, a return on equity of 25%, and a dividend yield of 15%

Answer 1

Answer:

The expected return on stock is 30%

Explanation:

Growth rate = Return on Equity * Retention ratio

Growth rate = Return on Equity * (1- Payout ratio)

Growth rate = 25% * (1 - 0.40)

Growth rate = 0.25 * 0.60

Growth rate =  0.15

Growth rate =  15%

Hence, Expected return = Dividend return + Growth rate

Expected return = 15% + 15%

Expected return = 30%

Therefore, the expected return on stock is 30%