CFA Practice Question

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CFA Practice Question

A company has a constant return on equity of 12% and a payout ratio equal to 35%. If the company expects to pay a dividend of $2 and has a stock price equal to $24, what is the expected rate of return?

A. 7.8%
B. 12%
C. 16.13%
Correct Answer: C

The growth rate can be computed from the payout and ROE rate: g = (1 - 0.35) x 12 = 7.8. Then the required return can be computed using the dividend-yield-plus-growth rate model: ks = D1/P0 + g.

Note: this is not in the required reading.

User Contributed Comments 2

User Comment
nufan (2/24) + 0,078 = 16,13
Domidu g= (1-payout)xROE
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