CFA Practice Question

CFA Practice Question

You have the following information for a firm ADS:

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

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
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