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**CFA Practice Question**

Dwight and Clark (a large manufacturing firm) is a stable company reporting the following financial information:

Dividends per share $0.30

Net Income $10 million

Equity $50 million

Earnings per share $1.50

Dividends per share $0.30

Net Income $10 million

Equity $50 million

Given the above information, calculate the company's expected dividend growth rate.

A. 80%

B. 20%

C. 16%

**Explanation:**The expected dividend growth rate = (Retention Rate) x (Return on Equity). Retention Rate = 1 - Payout Rate. Return on Equity = NI/E. Thus in this case the expected dividend growth rate = [1 - (0.3/1.5)] x ($10 million/$50 million) = (1 -0.2) x (0.2) = 0.16 or 16%.

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**User Contributed Comments**
2

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

HolzGe1 |
Great. I was so focused on the DuPont-Formula that I did not see the simple fact that ROE=NI/Equity. "How in hell am I supposed to get the ROE?!" :) |

farhan92 |
i figure out the ROE and then went with the premise that the most appropriate answer was C. Have been trying to replicate exam conditions and 220 questions in doing a long winded calculation is tough! |