In applying the variable-growth dividend valuation model to a company's stock, analysts frequently define the growth rate, g, as equal to
A) ROE multiplied by the firm's retention rate.
B) ROE divided by the dividend payout ratio.
C) the dividend payout ratio multiplied by the firm's retention rate.
D) P/E multiplied by the dividend payout ratio.

Question

Quizplus · Accepted Answer

The growth rate, g, in the context of the variable-growth dividend valuation model, is often calculated as the product of the Return on Equity (ROE) and the firm's retention rate (the proportion of earnings not paid out as dividends, also known as the plowback ratio). This is because the growth of dividends is fundamentally driven by how much the company earns (ROE) and how much of those earnings are reinvested in the business (retention rate) rather than distributed as dividends.

In Applying the Variable-Growth Dividend Valuation Model to a Company's