You are provided the following information about a stock: • Current price: $36.78 • Current annual dividend: $1.70 • Expected dividend growth rate: 4.5% for the next 2 years, 1.6% thereafter If the required rate of return on this stock is 8.5%, the intrinsic stock value according to the two-stage dividend discount model is closest to: $25 $26 $27

The dividends each year are: D1 = 1.70 * 1.045 = 1.7765 D2 = 1.70 * 1.045^2 = 1.8564 D3 = 1.70 * 1.045^2 * 1.016 = 1.8861 The terminal value at t = 2 is: V2 = 1.8861 / (0.085 – 0.016) = 27.3354 The intrinsic value of the stock at t = 0 is: V0 = 1.7765 / 1.085 + 1.8564 / 1.085^2 + 27.3354 / 1.085^2 = 26.43

Question Of The Week - Equity (5) - CFA Level 1

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This topic has 1 reply, 1 voice, and was last updated May-187:23 am by AdaptPrep.

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- AdaptPrep
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  05 May 2018 at 8:12 pm
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  You are provided the following information about a stock:
  • Current price: $36.78
  • Current annual dividend: $1.70
  • Expected dividend growth rate: 4.5% for the next 2 years, 1.6% thereafter
  
  If the required rate of return on this stock is 8.5%, the intrinsic stock value according to the two-stage dividend discount model is closest to:
  - $25
  - $26
  - $27
- AdaptPrep
  Participant
  - Undecided
  09 May 2018 at 7:23 am
  Up
  0
  ::
  The dividends each year are:
  
  D1 = 1.70 * 1.045 = 1.7765
  
  D2 = 1.70 * 1.045^2 = 1.8564
  
  D3 = 1.70 * 1.045^2 * 1.016 = 1.8861
  
  The terminal value at t = 2 is:
  
  V2 = 1.8861 / (0.085 – 0.016) = 27.3354
  
  The intrinsic value of the stock at t = 0 is:
  
  V0 = 1.7765 / 1.085 + 1.8564 / 1.085^2 + 27.3354 / 1.085^2 =
  26.43
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