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If the dividend payout ratio of a company is 70%, return on investment is 15% and cost of capital is…

The growth rate is 4.5%. The retention ratio is \(1-0.70=0.30\), and the growth rate is the retention ratio multiplied by the return on investment. Thus…

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If the dividend payout ratio of a company is 70%, return on investment is 15% and cost of capital is 12%, then what should be the growth rate?

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Correct answer A

The growth rate is 4.5%. The retention ratio is 1−0.70=0.301-0.70=0.30, and the growth rate is the retention ratio multiplied by the return on investment. Thus g=0.30×15%=4.5%g=0.30\times15\%=4.5\%; the cost of capital does not enter this calculation.

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  • West Bengal SET (WB SET)

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