NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Investing in Stocks (NISM XXI-A)
A stock has an EPS of ₹20 and pays a dividend of ₹8 per share. Its return on equity is 15% and the company retains the balance of earnings. Using the sustainable growth approach (growth = retention ratio × ROE), what is the expected growth rate?
The sustainable growth rate is 9%. Retention ratio is 60% because 40% of earnings are paid out, and multiplying this by the 15% return on equity gives 9%.
- A6%
- B9%Correct
- C15%
- D40%
Explanation
Payout ratio = 8/20 = 40%, so retention = 60%. Growth = 0.60 × 15% = 9%. Option 6% wrongly uses payout ratio × ROE (0.4 × 15%).
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