CFA Practice Question

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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
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