- CFA Exams
- CFA Level I Exam
- Study Session 13. Equity Investments (2)
- Reading 41. Equity Valuation: Concepts and Basic Tools
- Subject 2. Present Value Models: The Dividend Discount Model

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**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.

Profit Margin: 5%

Financial Leverage: 1.67

Payout Ratio: 25%

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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