A stock priced at £35.73 is projected to pay dividends of £1.50, £2.00, and £2.50 at the end of the next three years. At the time of the third dividend, the stock is expected to be worth £36.23. If the required rate of return for this stock is 10%, the intrinsic value of the stock is closest to: £32 £34 £36

The intrinsic value of the stock is equal to the present value of its cash flows. Year 1 CF: £1.50 dividend Year 2 CF: £2.00 dividend Year 3 CF: £2.50 dividend + £36.23 terminal value (£38.73 total) The present value of these payments at 10% is: PV = 1.50 / 1.1 + 2.00 / 1.1^2 + 38.73 / 1.1^3 = 32.11

Question Of The Week - Equity (4) - CFA Level 1

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This topic has 1 reply, 1 voice, and was last updated Jun-187:16 pm by AdaptPrep.

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- AdaptPrep
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  13 Jun 2018 at 7:27 pm
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  A stock priced at £35.73 is projected to pay dividends of £1.50, £2.00, and £2.50 at the end of the next three years. At the time of the third dividend, the stock is expected to be worth £36.23. If the required rate of return for this stock is 10%, the intrinsic value of the stock is closest to:
  - £32
  - £34
  - £36
- AdaptPrep
  Participant
  - Undecided
  16 Jun 2018 at 7:16 pm
  Up
  4
  ::
  The intrinsic value of the stock is
  equal to the present value of its cash flows.
  
  Year 1 CF: £1.50 dividend
  
  Year 2 CF: £2.00 dividend
  
  Year 3 CF: £2.50 dividend + £36.23
  terminal value (£38.73 total)
  
  The present value of these payments
  at 10% is:
  
  PV = 1.50 / 1.1 + 2.00 / 1.1^2 +
  38.73 / 1.1^3 = 32.11
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