D cengageBrain-My Home x O Aplia: Student Question x C Chegg s C fi courses apli

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D cengageBrain-My Home x O Aplia: Student Question x C Chegg s C fi courses aplia.com/af/servlet/quiz?quiz action takeQuiz&quiz; probGuid QNAPCOA801010000002e8c44a00800000&ctx; syildiz-0005&ck; 4-1460950207165 0AAA0559014F7497449ECAF30000 O 12.0% 17.0% 12.6% Estimating growth rates It is often difficult to estimate the expected future dividend growth rate for use in estimating the cost of existing equity using the DCF or DG approach. In general, there are three available methods to generate such an estimate Carry forward a historical realized growth rate, and apply it to the future Locate and apply an expected future growth rate prepared and published by security analysts. Use the retention growth model Suppose Kirby is currently distributing 50.00% of its earnings in the form of cash dividends. It has also historically generated an average return on equity (ROE) of 8.00%. Kirby's estimated growth rate is 7.50% 4.00% 8.50% 58.00% Flash Player WIN 21,0,0,2 16 Q3 3.34.1 2004-2016 Aplia. All rights reserved Grade It Now Save & Continue CO 2013 Cengage Learning except as noted. All rights reserved Suggestions l Session 57:51 Timeout 10:32 PM

Explanation / Answer

Solution:

By Retention Growth Model

Growth Rate = Retention Ratio x Return on Firm’s Investment (return on equity)

Retention Ratio = (1 - Dividend Payout Ratio) = (1 - 0.50) = 0.50

Return on Firm's investment (Return on Equity) = 8%

Growth Rate = 8% x 0.50 = 4%

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