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%

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