Question

Crane Inc. currently only returns cash to its investors in the form of dividends. It pays out 58.3% of its earnings per share. The return on new investment for Crane is 19.3%. Given this information, estimate the growth rate for the future dividends of Crane. Express your result in percent and round to two decimals (do not include the %-symbol in your answer).

Answer 1

Solution :

The formula for calculating the growth rate for future dividends is :

Growth rate = Rate of return on investment * Plow back Ratio

= Rate of return on investment * ( 1 – Dividend payout ratio )

As per the information given in the question we have

Rate of return on investment = 19.3 % = 0.193   ; Dividend payout ratio = 58.3 % = 0.583 ;

Applying the information available in the formula we have growth rate as :

= 0.193 * 0.583

= 0.112519

= 11.2519 %

= 11.25 % ( when rounded off to two decimal places )

Thus the growth rate = 11.25 %

The solution is growth rate = 11.25