### CFA Practice Question

There are 191 practice questions for this study session.

### CFA Practice Question

An investor gathers the following data for a company:

Net profit margin: 2%
Total assets: \$200 million
Total liabilities: \$120 million
Net income: \$10 million
Dividends paid on common stock: \$2 million

The company's estimated dividend growth rate (in %) is closest to ______.
A. 8.0
B. 10.0
C. 12.0
Explanation: ROE = Net income / Equity
Retention rate = 1 - (Dividends / Net income)
g = Retention rate x Return on equity
Equity = \$200 million - \$120 million = \$80 million
ROE = \$10 million / \$80 million = 12.5%
Alternatively, using the DuPont model: ROE = Return on assets x Financial leverage or
Profit margin x Total assets turnover x Financial leverage
Sales = NI / NPM = \$10 million / 0.02 = \$500 million
TAT = 500 / 200 = 2.5
Financial leverage = 200 / 80 = 2.5
ROE = 2 x 2.5 x 2.5 = 12.5%
Retention rate = 1 - (\$2 million / \$10 million) = 80%
Growth rate = 12.5% x 80% = 10%