CFA Practice Question

There are 191 practice questions for this study session.

CFA Practice Question

An analyst gathers the following data for a company to estimate the expected growth rate of dividends and use it as an input for valuing the company's common stock.

Return on Assets: 10%
Profit Margin: 5%
Financial Leverage: 1.67
Payout Ratio: 25%

The company's expected growth rate is closest to ______.
A. 8.8%
B. 12.5%
C. 14.1%
Explanation: g = RR x ROE; RR = (1 - Payout Ratio) = 1 - 0.25 = 0.75

ROE = ROA x Financial leverage

ROE = 10% x 1.67 = 16.67%; g = 0.75 x 16.67 = 12.5%

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