1.Given the following information about the Breex Company, what is the expected growth rate in earnings?

§ Dividend payout rate is 30%

§ Pretax income = $33 million

§ Tax rate = 25%

§ Sales = $250 million

§ Assets = $167 million

§ Equity = $66 million

A)   11.4%.

B)   19.2%.

C)   12.6%.

D)   26.6%.

2.According to the “clientele effect” of dividend policy, which of the following groups is most likely to be attracted to low dividend payouts?

A)   High-income individual investors.

B)   Pension funds.

C)   Corporations.

D)   Foundations.

3.All else equal, the source of capital with the highest cost is:

A)   debt.

B)   preferred stock.

C)   new common stock.

D)   retained earnings.

4.The following information pertains to Able Construction:

§ Sustainable growth = 10 percent.

§ Per-share dividend = $1.20.

§ Retention ratio = 65 percent.

§ Debt/capital ratio = 55 percent.

§ Stock price = $15.

Able’s return on equity (ROE) is closest to:

A)   8.0%.

B)   12.5%.

C)   15.4%.

D)   28.6%.

5.Global Industrial has a target dividend growth rate of 7% per year and a return on equity of 21%. What percent of earnings have to be retained to achieve the target dividend growth rate?

A)   300%.

B)   7%.

C)   66%.

D)   33%.

6.General Industrial retains 20% of profits and earns a 20%return on equity. What is its dividend growth rate?

A)   2%.

B)   16%.

C)   4%.

D)   0%.

7.Worldwide Manufacturing’s dividend payout ratio is 40 percent, and its return on equity is 15 percent. What is its dividend growth rate?

A)   9.0%.

B)   6.0%.

C)   4.0%.

D)   2.7%

1.Given the following information about the Breex Company, what is the expected growth rate in earnings?

§ Dividend payout rate is 30%

§ Pretax income = $33 million

§ Tax rate = 25%

§ Sales = $250 million

§ Assets = $167 million

§ Equity = $66 million

A)   11.4%.

B)   19.2%.

C)   12.6%.

D)   26.6%.

Click for Answer and Explanation D)

g = (1-payout rate)(ROE)
ROE = NI/Equity
NI = Pretax income x (1- tax rate) = $33.3 x (1-0.25) = $25 million 
ROE = NI/Equity = 25/66 = 0.38 or 38%
g = (1-0.3)(.38) = 0.266 or 26.6%

2.According to the “clientele effect” of dividend policy, which of the following groups is most likely to be attracted to low dividend payouts?

A)   High-income individual investors.

B)   Pension funds.

C)   Corporations.

D)   Foundations.

Click for Answer and Explanation A)

High-income individuals in high tax brackets would prefer capital gains over dividends as they have the greatest benefit from deferral of taxes.

3.All else equal, the source of capital with the highest cost is:

A)   debt.

B)   preferred stock.

C)   new common stock.

D)   retained earnings.

Click for Answer and Explanation C)

The required return to investors or cost of capital is greater for equity than for debt or preferred stock because debtors and preferred equity holders must be paid prior to common equity dividends. It is more costly to issue new common equity than the cost of retained earnings due to flotation costs.

4.The following information pertains to Able Construction:

§ Sustainable growth = 10 percent.

§ Per-share dividend = $1.20.

§ Retention ratio = 65 percent.

§ Debt/capital ratio = 55 percent.

§ Stock price = $15.

Able’s return on equity (ROE) is closest to:

A)   8.0%.

B)   12.5%.

C)   15.4%.

D)   28.6%.

Click for Answer and Explanation C)

G = (1-payout) × ROE
ROE = G / (1-payout) = G / retention ratio
ROE = 10% / 65% = 15.4%

5.Global Industrial has a target dividend growth rate of 7% per year and a return on equity of 21%. What percent of earnings have to be retained to achieve the target dividend growth rate?

A)   300%.

B)   7%.

C)   66%.

D)   33%.

Click for Answer and Explanation D)

G = (Retention rate) (ROE)

0.07 = Retention rate(0.21)

0.07/0.21 = Retention Rate = 0.33

6.General Industrial retains 20% of profits and earns a 20%return on equity. What is its dividend growth rate?

A)   2%.

B)   16%.

C)   4%.

D)   0%.

Click for Answer and Explanation C)

G = (Retention rate) (ROE) = 0.2(0.2) = 0.04

7.Worldwide Manufacturing’s dividend payout ratio is 40 percent, and its return on equity is 15 percent. What is its dividend growth rate?

A)   9.0%.

B)   6.0%.

C)   4.0%.

D)   2.7%

Click for Answer and Explanation A)

G = (Retention rate) (ROE)

G = (1-0.4) (0.15) = (0.6)(0.15) = 0.09, or 9 percent