btcapital

14. This question requires knowledge of Gordon's growth model and Du Pont Analysis

g = bxROE where g=growth b=retention ratio ROE= return on equity

the net profit(net income) can either be distributed to the shareholders as dividends or re-invested in the form of retained earnings. the retention ratio measures what proportion of the earnings is retained. the dividend payout ratio measures what proportion of earnings is distributed in the form of dividends.

thus dividend payout = 1- retention ratio


If that is clear, then u have growth rate but need to calculate ROE and b to find the payout ratio.

Du Pont analysis
ROE= net profit magin x asset turnover x leverage

You'l get an ROE of 20% or 0.2

substitute into g = b x ROE

b= 20% / 20%= 100% i.e. all earnings are retained. if all earnings are retained, then dividend payout should be

1- 100%= 1-1= 0%