ACCA FM · Chapter 11 · Question 2 of 11
A company retains 60% of its earnings each year and earns a return of 15% on reinvested funds. Using Gordon's growth model, what is the expected dividend growth rate?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) 9.0%
Explanation
Gordon's growth model: g = r x b, where b is the proportion of earnings retained and r the return on reinvested funds. g = 15% x 0.60 = 9.0%. Using the payout ratio (40%) instead of the retention ratio gives 6.0%.
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