- CFA Exams
- CFA Level I Exam
- Topic 1. Quantitative Methods
- Learning Module 2. Time Value of Money in Finance
- Subject 3. Equity Instruments and the Time Value of Money
CFA Practice Question
The current price of Galaxy Electronics stock is $50.00. Dividends are expected to grow at 7% indefinitely and the most recent dividend was $1. What is the required rate of return on Galaxy Electronics stock?
B. 9.3%
C. 9.0%
A. 9.1%
B. 9.3%
C. 9.0%
Correct Answer: A
User Contributed Comments 11
| User | Comment |
|---|---|
| cgeek | why A ? 50 = 1 / (x - 7%) x = 9 % |
| jamiejamie | because the $1 dividend is the MOST RECENT. The dividend value in the infinite DDM formula is the value of the divident after one year. So you have to put 1.07 in the numerator, not $1. When you use that value, you will get 9.0914 |
| jamiejamie | sorry, you will get 0.0914! (9.14%) |
| morpheus918 | Answer is $9. $1 should be in the dividend, not 1.07 because $50 is the price now, not a year in the future. |
| morpheus918 | Oops! Where's the delete key? Jamie's right, 9.14% is correct. |
| accounting | the working is (1.07/50)+.07 all by 100 |
| Rotigga | $50 = $1(1+0.07)/(r-0.07); 50r - 3.5 = 1 + 0.07; 50r = 4.57; r = 0.0914 = 9.14% |
| missmalik | Value for indefinate model is = Do(1+g)/k-g 50=1.07/k-7% multiply both side by (k-.07)= 50k-3.5=1.07 50k=1.07+3.5 k=4.57/50=.0914*100= 9.14% |
| 11Blaise | Value for indefinate model is = Do(1+g)/k-g 50=1.07/k-7% (D1/EPS)=.0214 k-g=.0214 .0214+G=K k=.0914 |
| loisliu88 | it's the cost of common stock-dividend discount model: r= D1/P + g |
| tochiejehu | use the constant growth formular and make r d subject of formular |