- CFA Exams
- CFA Level I Exam
- Study Session 13. Equity Investments (2)
- Reading 41. Equity Valuation: Concepts and Basic Tools
- Subject 2. Present Value Models: The Dividend Discount Model
CFA Practice Question
If the return on equity of a firm is 15% and the retention ratio is 40%, the sustainable growth rate of the firm's earnings and dividends should be ______.
A. 6%
B. 9%
C. 15%
Explanation: 15% x 0.4 = 6%
User Contributed Comments 4
| User | Comment |
|---|---|
| copus | Tricky wording...this is why it is so important to slowly read the question. This question refers to the retention ratio and not the payout ratio. |
| kellyyang | yep, I made a big mistake to look at payout ratio! I thought this is very easy question; thus very sloppy! |
| bloomt | The question asks for growth on Earnings AND Dividends, doesn't the entirety of RoE go into these two factors? I understand that retention would go towards future earnings growth, but I would also think that current Payout ratio is required for Dividend Growth??? |
| dipu617 | I did the same mistake too. Its retention ratio, not payout... :-) |