CFA Practice Question

There are 191 practice questions for this study session.

CFA Practice Question

Which of the following amounts is closest to what should be paid for Aerodynamic Common stock? Aerodynamic has just paid a dividend of $4.50. These dividends are expected to grow at a rate of 5% forever. The risk of this company suggests that future cash flows should be discounted at a rate of 9%.

A. $113
B. $118
C. $123
Correct Answer: B

Value of stock = D0(1+g)/(r-g) = 4.5(1+0.05)/(0.09-0.05) = $118.125

User Contributed Comments 16

User Comment
haarlemmer $123 stands for the expected dividend!
ipallete The formula needs the NEXT dividend (not yet paid). If we know last dividend and growth rate we can get D1=D0(1+g).
jade But how do you know that you have to use the infinite growth model
steved333 Don't forget to apply the (1+g) to the $123.
bmeisner Hmmm Jade, how do you know to use infinite growth model? Maybe because it says the word forever right in the sentence, ever think of that?
kutta2102 What's with the sarcasm bmeisner? Haven't you ever made a misread a question?
rfvo Anyone know the BA workings?
rfvo LOL, cant believe i posted that...6 months down the line and i dont need my BA any more, takes way to much time.
CFALucille why do you multiple number by 1.05? I thought formula was V = D/k-g
IvanTG Lucille, the question is relating to current dividend value not future, therefore we need to adjust it for the estimated growth of 5%...I got it wrong too ;-)
thekobe Lucille you have to apply V=D*(1+g)/k-g
johntan1979 Yup, got me too. Next period's dividend.
jonan203 you are paying for FUTURE dividends, not dividends that have already been paid.

if a stock pays a $5 dividend yesterday and the assumed rate of dividend growth is 5%, you have to discount the future dividend $5(1.05) by the spread between the discount and growth rate.

discount the future $5.25, not the past $5.00
davidmort I got 117
tochiejehu use d Constant Growth formular to get the answer
kseeba17 Just learn how to use a normal calculator people, that way you actually understand it.
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