- 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
Which of the following amounts is closest to what should be paid for Aerodynamic Common stock? Aerodynamic has just paid a dividend of $4.50. These dividends are expected to grow at a rate of 5% forever. The risk of this company suggests that future cash flows should be discounted at a rate of 9%.
B. $118
C. $123
A. $113
B. $118
C. $123
Correct Answer: B
Value of stock = D0(1+g)/(r-g) = 4.5(1+0.05)/(0.09-0.05) = $118.125
User Contributed Comments 16
| User | Comment |
|---|---|
| haarlemmer | $123 stands for the expected dividend! |
| ipallete | The formula needs the NEXT dividend (not yet paid). If we know last dividend and growth rate we can get D1=D0(1+g). |
| jade | But how do you know that you have to use the infinite growth model |
| steved333 | Don't forget to apply the (1+g) to the $123. |
| bmeisner | Hmmm Jade, how do you know to use infinite growth model? Maybe because it says the word forever right in the sentence, ever think of that? |
| kutta2102 | What's with the sarcasm bmeisner? Haven't you ever made a misread a question? |
| rfvo | Anyone know the BA workings? |
| rfvo | LOL, cant believe i posted that...6 months down the line and i dont need my BA any more, takes way to much time. |
| CFALucille | why do you multiple number by 1.05? I thought formula was V = D/k-g |
| IvanTG | Lucille, the question is relating to current dividend value not future, therefore we need to adjust it for the estimated growth of 5%...I got it wrong too ;-) |
| thekobe | Lucille you have to apply V=D*(1+g)/k-g |
| johntan1979 | Yup, got me too. Next period's dividend. |
| jonan203 | you are paying for FUTURE dividends, not dividends that have already been paid. if a stock pays a $5 dividend yesterday and the assumed rate of dividend growth is 5%, you have to discount the future dividend $5(1.05) by the spread between the discount and growth rate. discount the future $5.25, not the past $5.00 |
| davidmort | I got 117 |
| tochiejehu | use d Constant Growth formular to get the answer |
| kseeba17 | Just learn how to use a normal calculator people, that way you actually understand it. |