Equity growth rate

CFA Level II Equities
#1

Hi all

I’ve doing a mock from quartic training - requires calculation of growth rate to derive justified trailing P/E & Div yields. The key info is;

Net income 237m

Dividends 142m

BV equity 1480

MV equity 1890

…now i tried to find ROE (not given x retention). Instead equity required return is given as 11.0%, so I figured g= 11% - (142/1890)=3.5%

However, quartic calculate growth as retained profits 95m ÷ book value of equity 1480 = 6.42%

I haven’t seen this formula before- can someone please explain and/ or provide CFA reference. Could it be a mistake even? I would be most grateful for your solution. Thank you

#2

ROE = NI/BV Equity = 237/1480 = 16%

Payout ratio = Divs / NI = 142 / 237 = 60% so b = 40%

g = ROE x b = .16 x .40 = 6.40%

#3

Thanks Jay.

I didn’t want to use the ending BV of equity only, but now I see they indicate to use closing b/s values.

Is my my r= 11% - 142/1890 theoretically wrong or right and just not what the question is looking for? Thanks in advance