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Basic Question 1 of 7
An analyst has gathered the following data to value a firm:
- The firm's beta: 0.9.
- Required rate of return: 8%.
- The firm paid a dividend of $3 in the current year. It is expected to grow by 10% annually for the next three years and 3% per year thereafter.
- Payout ratio: 30%.
What should the stock price be?
User Contributed Comments 4
| User | Comment |
|---|---|
| quanttrader | why can't we use the H model here? |
| quanttrader | ahh I get it, use the H model when supernormal growth is not constant rather converges to the sustainable growth rate; use the multi-period dividend model when supernormal growth is constant. |
| b25331 | To save time at the exam, find cash flows and plug them into the BAII calculator - it will take under a minute y1 = 3.3 (C01) y2 = 3.63 (C02) y3 = 3.993 + (3.993 x 1.03) / (0.08 - 0.05) = 86.253 (C03) I = 8 NPV result = 74.638 |
| jbrecevic | ^ Denom should be Long term growth rate, not .05, (.08-.03) = .05 |
I am using your study notes and I know of at least 5 other friends of mine who used it and passed the exam last Dec. Keep up your great work!
Barnes
Learning Outcome Statements
explain the assumptions and justify the selection of the two-stage DDM, the H-model, the three-stage DDM, or spreadsheet modeling to value a company's common shares;
describe terminal value and explain alternative approaches to determining the terminal value in a DDM;
calculate and interpret the value of common shares using the two-stage DDM, the H-model, and the three-stage DDM;
explain the use of spreadsheet modeling to forecast dividends and to value common shares;
evaluate whether a stock is overvalued, fairly valued, or undervalued by the market based on a DDM estimate of value.
CFA® 2025 Level II Curriculum, Volume 3, Module 21.