CFA Practice Question

CFA Practice Question

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

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%.

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!
You need to log in first to add your comment.