CFA CFA Level 1 Question of the Week – Equity Investments

Question of the Week – Equity Investments

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    • exam_whiz
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      Dividends on a stock are expected to grow at 25% for three years, after which, they are expected to grow at 3% per annum, indefinitely. If the last dividend paid was $1.25 and the required return rate is 12%, the value of the stock is

      • $24.58
      • $32.63
      • $28.91
    • NaidenB
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      Actually its $32.63. Right?

    • exam_whiz
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      The answer is 24.58. Here is the calculation:

      Yr 1 Div: 1.25*1.25 = 1.56
      Yr 2 Div: 1.5625*1.25 = 1.95
      Yr 3 Div: 1.95*1.25 = 2.44
      Yr 4 Div: 2.44*1.03 = 2.51

      The trick is to value the stock at the end of yr 3 when there is level growth and add to the first 3 years worth of dividends.

      EOY 3 value= 2.51/(.12-.03) = 27.94

      PV = 1.56/1.12 + 1.95/1.12^2 + 2.44/1.12^3 + 27.94/1.12^3 = 24.58

    • shannondaily
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      I don’t think this is right. 

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