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

"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. That�s 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 analyst�s estimate of \$40 is ex-dividend.

### CFA Discussion Topic: A confusing question? 