- CFA Exams
- CFA Level I Exam
- Topic 5. Equity Investments
- Learning Module 41. Equity Valuation: Concepts and Basic Tools
- Subject 3. Present Value Models: The Dividend Discount Model
CFA Practice Question
A stock is expected to pay dividends of $1.75 and $2.00 over the next two years, after which its price is projected to be $37.50. If the market's discount rate is 11.5%, what should be the current value of this stock?
A. $33.34
B. $30.23
C. $33.70
Explanation: The holding period approach requires that cash flows over the next two years be discounted to the present. Cash flows are:
CF1 = 1.75; CF2 = 2.00 + 37.50 = 39.50; using a financial calculator, PV @ 11.5% = 33.34.
User Contributed Comments 7
| User | Comment |
|---|---|
| DLUCFA | If use financial calculator, HPC: CF1, CF2, 11.5 i, 2 n, NPV |
| Bren007 | Using a Texas Professional calulator, how is the above worked out? Tks |
| Bibhu | In texas BA II - 1. Press CF + 2nd + Clear work. ( CF0 would still be displayed as 0.000) 2. Down arrow 3.1.75 + Enter ( C01=1.75) 4. Down arrow 5.1 + Enter ( F01 =1) 6. down arrow 7.39.5 + Enter (C02=39.5) 8.Down arrow 9. 1+ Enter (F02=1) 10.CPT + NPV 11. 11.5 + Enter ( I=11.5) 12.CPT ( NPV =33.34 will be displayed) |
| kellyyang | other way to easy way to slove this problem" 1.75/(1+11.5%)+ ( 2+37.5)/( 1+11.5%)^2=33.34 |
| bidisha | Thanks bibhu |
| Batoold89 | the question should have stated clearly that the investor is to sell the share in order for us to consider the 37.5 a cash flow... |
| Dabuya | It does not matter if the investor is going to sell it or not. 37.5 is the terminal value and you do have to consider it @Batoold89 |