- 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
This year, Flower Buds expects to pay a dividend of $0.60 per share on the 60,000 shares outstanding. Flower Buds expects to have a payout ratio of 40%. How much income does Flower Buds expect to earn?
A. $14,400
B. $60,000
C. $90,000
Explanation: Dividends = 60,000 x 0.60 = $36,000
Net Income = 36,000 / 0.4 = $90,000
Net Income = 36,000 / 0.4 = $90,000
User Contributed Comments 5
| User | Comment |
|---|---|
| lazio | my head is blocked, I seem not to get it. Can someone clarify me on that, please? |
| vadklim | Total dividends paid in terms of money will be usd 36 000 for all shares outstanding. Assuming 40% of the earnings is paid out as dividens the total earnings are 36 000 / 0.4 = usd 90 000 |
| miene | If the Company pays out a dividend of $0.60 per share and this figure correlates with 40% paid out then 60% or $0.90 per share is retained. Therefore total earnings per share are $0.90+ $0.60 = $1.50 per share. so $1.50 x 60000 = 90000.00 earnings |
| jonnyp | $.60/.40 *60,000=90,000 |
| sumeetb | DPR is Div/NI, So NI= Div/DPR |