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I am not clear on the calculation of the retention rate as solved in the bpp text.The question is:
There is a dividend yield of 3.8% and PE ratio of 15.3. What is the retention rate.
They solved it as follows :
retention rate = 1-0.038*15.3 =41.68%
May you please clarify why it was solved this way. I don’t understand.
You really need to use a bit of algebra 🙂
The retention rate = (E – D) / E = 1 – D/E
D = 0.038 x MV
PE = MV/E = 15.3, so E = MV / 15.3
So retention rate = 1 – ( 0.038MV / (MV / 15.3)) = 1 – (0.038 x 15.3)
I am puzzled why knowing the page number makes any difference whatsoever to the calculation 🙂
could you pls. advise which question is it, where the formula The retention rate = (E – D) / E come from?
I don’t know what you mean by which question.
The retention rate should not be learning a formula – it is basic Paper F3.
The amount retained is (earnings – dividend).
Therefore the retention rate = (earnings – dividend) as a percentage of the earnings.
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