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**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%.

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**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 |