- 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
A portfolio manager is currently evaluating one of the stocks in the portfolio by looking at the following data:
Current earnings per share: $1.82
Total no. of shares outstanding: 22 million
Book value of common equity: $350 million
Current dividend per share: $0.75
Current earnings per share: $1.82
Total no. of shares outstanding: 22 million
Book value of common equity: $350 million
What is the best estimate of this particular company's dividend growth rate?
A. 4.7%
B. 6.7%
C. Inconclusive given the data
Explanation: Sustainable Growth Rate = ROE ( 1 - Dividend Payout Ratio) = [($1.82 x 22M)/$350M] [1 - 0.75/1.82] = 6.7%
Note: ROE equals total earnings divided by total equity book value.
User Contributed Comments 3
| User | Comment |
|---|---|
| yxten1 | The trick is to relate this question to sustainable growth theory |
| birdperson | g = rr * ROE |
| akivag | Isn't ROE assuming calculations using Market Value of Equity? |