- 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**

What would Jackie pay for a stock that is expected to pay a $1.50 dividend in one year if the expected dividend growth rate is 3% and she requires a 16% return on her investment? Jackie would pay ______.

B. $12.43

C. $11.54

D. $14.30

E. $12.33

A. $13.14

B. $12.43

C. $11.54

D. $14.30

E. $12.33

Correct Answer: C

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**User Contributed Comments**
10

User |
Comment |
---|---|

Rajain |
Why C 1.5/(0.16-0.03) = 11.5384 |

cfahanoi |
Expected devidend = D1 => V = 1.5/(.16-.03) = 11.54 |

rfvo |
Remember expected dividend, so no need to multiply growth. Current dividend multiply by growth rate. |

fmhp |
Thank you rfvo: good hint! |

moneyguy |
tricky one. |

Jamberto |
wouldn't it be: (D*1+G)/(R-G) = (1.50*1.03)/(.16-.03) = 11.88 ??? |

jonan203 |
jamberto: no, 1.5 is the future dividend that has NOT been paid, which implies that the previous dividend was 1.45. [1.45(1.03)] / (.16 - .03) = 11.54 |

tochiejehu |
D1 =Expected dividend=1.50 and apply d constant growth model |

Inaganti6 |
hahaha this is tricky ? |

MathLoser |
No, it is not. |