FerrariF1 is forecast to have a dividend growth rate of 8.69% in perpetuity and its dividend payout ratio (DPY) is expected to be equal to 50% in perpetuity. What is the expected return on equity (ROE) equal to? Do not enter the % sign in your answer.If you solve this problem with algebra, round any intermediate calculations to 6 decimal places.Write your answer as a whole number, not a decimal. In all cases round your final answer to two decimal places, e.g. 8.723456% (0.082734), write 8.72
Question
FerrariF1 is forecast to have a dividend growth rate of 8.69% in perpetuity and its dividend payout ratio (DPY) is expected to be equal to 50% in perpetuity. What is the expected return on equity (ROE) equal to? Do not enter the % sign in your answer.If you solve this problem with algebra, round any intermediate calculations to 6 decimal places.Write your answer as a whole number, not a decimal. In all cases round your final answer to two decimal places, e.g. 8.723456% (0.082734), write 8.72
Solution
The dividend growth rate (g) in the Gordon Growth Model is calculated as the product of the retention ratio (b) and the return on equity (ROE). The formula is:
g = b * ROE
Where: b = retention ratio = 1 - dividend payout ratio ROE = return on equity
Given that the dividend payout ratio (DPY) is 50%, the retention ratio (b) is 1 - 0.5 = 0.5.
Substituting the given values into the formula and solving for ROE, we get:
8.69% = 0.5 * ROE ROE = 8.69% / 0.5 ROE = 17.38%
So, the expected return on equity (ROE) is approximately 17.38%.
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