- CFA Exams
- CFA Level I Exam
- Topic 4. Corporate Issuers
- Learning Module 33. Cost of Capital-Foundational Topics
- Subject 3. Cost of Common Equity

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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?

B. 12%

C. 16.13%

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: k_{s} = D_{1}/P_{0} + g.

Note: this is not in the required reading.

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**User Contributed Comments**
2

User |
Comment |
---|---|

nufan |
(2/24) + 0,078 = 16,13 |

Domidu |
g= (1-payout)xROE |