CIMA F3 Syllabus A. Financial policy decisions - Gordon's growth - Notes 5 / 12
This presumes that you grow by investing what you keep in the business
Therefore the more you give away (as dividends) the less you grow...
Return on Investment 12%
Retained ratio 60%
Growth would be?
g = r x b
g = 12% x 60% = 7.2%
Of course the examiner could be Mr. Annoying and give you a dividend payout ratio instead...
ROI = 10%
Divdend Payout Ratio = 70%
What is the growth?
Well if the payout ratio is 70%, therefore the retained ratio is 30%
So, 10% x 30% = 3%
Finally the examiner could be Captain Double Annoying and ask for the dividend to be paid out... cheeky monkey
ROI = 10%
Growth = 4%
Earnings = 100
Whats the dividend?
So Retained ratio = 4/10 = 40%
So Dividend payout ratio = 60%
So Dividend is 60% x 100 = 60