CFA Practice Question

There are 151 practice questions for this study session.

CFA Practice Question

A firm has a 30 percent constant dividend payout ratio and a return on equity of 25 percent. The dividend growth rate would be closest to:
A. 7.5%
B. 17.5%
C. insufficient information given
Explanation: The growth rate in dividends would be equal to the retention ratio times the return on equity. In this case it would be (1-.30) x 25% = 17.5%.

User Contributed Comments 4

User Comment
wink26 I solved the question using the following hypothetical:

Equity in period 0 = 100
Div = 30

Equity in period 1 = 125
Div = 37.5 (.3*125)

(37.5-30)/30 = 25%

How is this wrong? I know I'm missing some logic, just can't see what it is.
ljamieson g = (1- b) x ROE
levonb wink26: use the formula provided by ljamieson.

THe problem with your calc is that Equity in period 1 would not be 125 as some of it would have been paid out.

Also a 30% payout ratio is 30% of NI not Equity.
darbyland it's not g = (1-b)ROE - its g = b*ROE where b=retention ratio, making 1-b = payout ratio
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