CFA Level 1 - Equity Investments
The country risk premium should be added to the general risks a security faces when estimating the required return for a foreign security.
The Implied Dividend Growth Rate
A company's dividend growth rate can be derived from a company's ROE and its retention rate.
The retention rate of a company is the amount of earnings a company retains for its internal growth. A company's ROE is the return on the funds invested back into the company. Keep in mind that the growth rate of the firm is the identified ability of a firm to grow its operations and the ROE is the return the company is able to earn on invested funds. The company's growth rate can be calculated as follows:
|Growth rate = (retention rate)(ROE)|
Example: Estimate a dividend growth rate given ROE and retention rate
Newco assumes a constant ROE of 15%. The company anticipates a retention rate of 60% to fund new projects (indicating the firm will pay out 40% in dividends). What is Newco's dividend growth rate?
g = (retention rate)(ROE)
g = (0.60)(0.15)
g = 0.09 or 9%