CFA CFA Level 1 Question of the Week – Equity

Question of the Week – Equity

  • Author
    Posts
    • AdaptPrep
      Participant
      Up
      0
      Down

      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
      Up
      0
      Down

      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

Viewing 1 reply thread
  • You must be logged in to reply to this topic.