CFA Practice Question

There are 96 practice questions for this study session.

CFA Practice Question

Which of the following is the LEAST ACCURATE with respect to determining terminal value in a discounted dividend model?

A. Terminal value may be estimated as the product of the expected earnings at the terminal date and the expected P/E ratio for the stock at that point in time.
B. Terminal value may be estimated as the product of the expected dividends at the terminal date and the expected dividend yield for the stock at that point in time.
C. Terminal value may be estimated as the product of the expected book value per share at the terminal date and the expected price to book ratio for the stock at that point in time.
Correct Answer: B

Terminal value is the market value of the security at the end of the investment horizon. It may be estimated as the RATIO of the expected dividends at the terminal date and the expected dividend yield for the stock at that point in time. In other words:

Terminal value = Terminal Dividend / Terminal Dividend Yield = DT/(DT/PT) = PT

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