Question

Rose Hill Trading Company is expected to have EPS in the upcoming year of $8. The expected ROE is 18%. An appropriate required return on the stock is 14%. If the firm has a plowback ratio of 70%, its dividend in the upcoming year should be ________.

Answer 1

Answer:

The dividend in the upcoming year should be $2.40

Explanation:

Given:

EPS(Earnings Per Share) = $8

Expected ROE(return on equity) = 18%

Appropriate required return = 14%

Plowback ratio = 70%

Required:

Find the dividend

To find the dividend, we need to first calculate the dividend payout ratio.

To find the dividend payout ratio, use the formula below:

Dividend payout ratio = 1 - plowback ratio

= 1 - 0.70

= 0.30 ≈ 30%

The dividend payout ratio is 30%

Therefore, the dividend for the upcoming year would be calculated using the formula below:

Upcoming dividend = upcoming EPS × dividend payout ratio

= $8 × 30%

= $2.4

The dividend in the upcoming year should be $2.4