AuthorTopic: A confusing question?
welkabbadj
@2014-05-01 07:33:17
A review question asks:

"An analyst estimates that a stock will pay a $2 dividend next year and that it will sell for $40 at year-end. If the required rate of return is 15%, what is the value of the stock?"

I thought this meant that next year a 2 dollar dividend is paid, and at the end of this year it is sold for $40. Thatís not the case. What am I missing in the grammatical structure of this sentence so I don\'t run into this problem on the exam?
ron1707
@2014-05-09 12:44:00
I don't care for this question because I would not place any weight on an analyst's target price but here is how I would answer the question, assuming I believed the analyst.

Total cash flow next year if you buy the stock should be $42 ($40 stock price plus $2 in dividends). The discount factor for 1 year at 15% is 0.8696 which was calculated as 1/(1+.15), Multiplying the discount factor and the $42 of cash results in a net present value of $36.52. This assumes the analystís estimate of $40 is ex-dividend.

CFA Discussion Topic: A confusing question?

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Your review questions and global ranking system were so helpful.
Lina

Lina