CFA Practice Question

There are 201 practice questions for this study session.

CFA Practice Question

Consider the following information:

  • ROE = 12%.
  • Required rate of return on equity = 10%.
  • Dividend payout ratio = 60%.
  • The company's justified P/B, using the residual income model and a constant growth rate assumption, is ______.
A. 1.56
B. 1.38
C. 1.30
Explanation: g = b x ROE = (1 - 0.60) x 0.12 = 0.048.
P0/B0 = (ROE - g) / (r - g) = (0.12 - 0.048) / (0.1 - 0.048) = 1.38.
or P0/B0 = 1 + (ROE - r) / (r - g) = 1 + (0.12 - 0.1)/(0.1 - 0.048) = 1.38.

User Contributed Comments 1

User Comment
jsp2012 Or P/B = (ROE * Payout rate) / (r - g)
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