Question

Question 9 Dividends on CCN corporation are expected to grow at a 9% per year. Assume that the discount rate on CCN is 12% and that the expected dividend per share in one year is $0.50. CCN has just paid a dividend, so the next dividend is the $0.50 to be paid one year from now. Assume that CCN's return on equity (ROE) is 12%. What fraction of earnings must CCN be plowing back into the company

Answer 1

Answer: 75%

Explanation:

The fraction of earnings that CCN must be plowing back into the company goes thus:

Growth rate = 9%

Discount rate = 12%

Expected dividend per year = $0.50

Return on equity = 12%

It should be noted that:

Growth rate = plowback ratio × Return on equity

9% = plowback ratio × 12%

Therefore, plowback ratio = 9% / 12%

Plowback ratio = 75%

Therefore, fraction of earnings must CCN be plowing back into the company is 75%.