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 Johnson is currently distributing 45% of its earnings in the form of cash dividends. It has also historically generated an average return on equity (ROE) of 20%. Johnson’s estimated growth rate is %.
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 Johnson is currently distributing 45% of its earnings in the form of cash dividends. It has also historically generated an average return on equity (ROE) of 20%. Johnson’s estimated growth rate is %.
Foundations of Business - Standalone book (MindTap Course List)
4th Edition
ISBN:9781285193946
Author:William M. Pride, Robert J. Hughes, Jack R. Kapoor
Publisher:William M. Pride, Robert J. Hughes, Jack R. Kapoor
Chapter15: Using Management And Accounting Information
Section: Chapter Questions
Problem 5DQ
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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 Johnson is currently distributing 45% of its earnings in the form of cash dividends. It has also historically generated an average return on equity (ROE) of 20%. Johnson’s estimated growth rate is %.
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