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**CFA Practice Question**

You have the following information for a firm ADS:

ADS expected yearly (perpetual) growth rate = 3% per annum

expected market return = 7.25% per annum

ADS bond yield = 6.5% per annum

ADS stock price today = $20

riskfree rate = 3.5% per annum

ADS (Judgmental) Risk Premium = 3.5%

ADS expected yearly dividend one year from now = $1.2

ADS expected yearly (perpetual) growth rate = 3% per annum

expected market return = 7.25% per annum

ADS bond yield = 6.5% per annum

ADS stock price today = $20

riskfree rate = 3.5% per annum

ADS (Judgmental) Risk Premium = 3.5%

What is ADS Cost of Retained Earnings using the Dividend Yield plus Growth Rate Approach?

A. 10%

B. 9.5%

C. 10.25%

**Explanation:**Cost of Retained Earnings = (Dividends/Stock Price) + Judgmental Risk Premium

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**User Contributed Comments**
3

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

arudkov |
a think we should add growth rate, not risk P |

dream007 |
it is 9.5% 1.2/20 + .035 = .095 |

harrybay |
The name of the formula is Dividend Yield plus Growth Rate. Not Dividend Yield plus Judgemental Risk Premium |