- 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

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**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.

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**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? |