- CFA Exams
- CFA Level I Exam
- Study Session 13. Equity Investments (2)
- Reading 41. Equity Valuation: Concepts and Basic Tools
- Subject 2. Present Value Models: The Dividend Discount Model

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**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

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**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 |