CFA Practice Question

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CFA Practice Question

A large manufacturing company is in a competitive industry. It has above-average investment opportunities and its return on investments has been above the required rate of return. The firm retains a large portion of earnings to fund its superior investment projects. The company is best characterized as a ______.

A. growth company
B. cyclical company
C. speculative company
Correct Answer: A

Growth companies are characterized by above-average investment opportunities that yield rates of return greater than the firm's required rate of return. They also retain a large portion of their earnings to fund superior investment projects and hence they tend to have low dividend payout ratios.

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