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Practice CPA®CPA BAR Practice ExamQuestion 18

Medium1 markMultiple Choice

Area 2: Financial Statement AnalysisFinancial AnalysisGrowth AnalysisSGR

CPA · Question 18 · Area 2: Financial Statement Analysis

A company has a Sustainable Growth Rate (SGR) of 8%. Its Return on Equity (ROE) is 12%. What is the company's Dividend Payout Ratio?

Answer options:

A.

66.7%

B.

33.3%

C.

4.0%

D.

50.0%

How to approach this question

Formula: SGR = ROE * (1 - Payout Ratio). Solve for Payout Ratio.

Full Answer

B.33.3%✓ Correct

B

Retention Ratio = SGR / ROE = 8% / 12% = 2/3 or 66.7%. Payout Ratio = 100% - Retention Ratio = 33.3%.

Common mistakes

Confusing Retention Ratio with Payout Ratio.

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