LOS g: Summarize the factors affecting dividend payout policy.

Q1. Worldwide Manufacturing’s dividend payout ratio is 40%, and its return on equity is 15%. What is its dividend growth rate?

A)   9.0%.

B)   4.0%.

C)   6.0%.

Q2. General Industrial retains 20% of profits and earns a 20%return on equity. What is its dividend growth rate?

A)   4%.

B)   16%.

C)   2%.

Q3. 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)   33%.

C)   66%.

Q4. The following information pertains to Able Construction:

• Sustainable growth = 10%.
• Per-share dividend = $1.20.
• Retention ratio = 65%.
• Debt/capital ratio = 55%.
• Stock price = $15.

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

A)   8.0%.

B)   15.4%.

C)   12.5%.

Q5. All else equal, the source of capital with the highest cost is:

A)   preferred stock.

B)   debt.

C)   new common stock.

Q6. 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)   Corporations.

C)   Pension funds.

Q7. 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)   12.6%.

B)   11.4%.

C)   26.6%.

LOS g: Summarize the factors affecting dividend payout policy. fficeffice" />

Q1. Worldwide Manufacturing’s dividend payout ratio is 40%, and its return on equity is 15%. What is its dividend growth rate?

A)   9.0%.

B)   4.0%.

C)   6.0%.

Correct answer is A)

G = (Retention rate) (ROE)

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

Q2. General Industrial retains 20% of profits and earns a 20%return on equity. What is its dividend growth rate?

A)   4%.

B)   16%.

C)   2%.

Correct answer is A)

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

Q3. 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)   33%.

C)   66%.

Correct answer is B)

G = (Retention rate) (ROE)
0.07 = Retention rate(0.21)
0.07/0.21 = Retention Rate = 0.33

Q4. The following information pertains to Able Construction:

• Sustainable growth = 10%.
• Per-share dividend = $1.20.
• Retention ratio = 65%.
• Debt/capital ratio = 55%.
• Stock price = $15.

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

A)   8.0%.

B)   15.4%.

C)   12.5%.

Correct answer is B)

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

Q5. All else equal, the source of capital with the highest cost is:

A)   preferred stock.

B)   debt.

C)   new common stock.

Correct answer is 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.

Q6. 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)   Corporations.

C)   Pension funds.

Correct answer is A)

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

Q7. 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)   12.6%.

B)   11.4%.

C)   26.6%.

Correct answer is C)

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

b

thanks