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COST OF CAPITAL
Growth rates
Formula: g = r x b
r = rate of return on reinvested capital (ROE)
b = portion of profits retained and reinvested (profits not paid out
as a dividend).
Example 1:
A company has a return of 10% on equity. Its policy is to distribute 80% of profits as a dividend.
What is the dividend growth rate?
g = r x b
= 10% (20%)
= 2%
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