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 |