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**CFA Practice Question**

A constant growth stock has just paid a dividend of 2.75 a share. The market anticipates its long-term growth to average 6.5%. The stock has a beta of 1.24, with the market risk premium at 3.75% and the risk-free rate at 2.75%. What is the estimated current value of the stock?

A. $45.05

B. $305.56

C. $325.42

**Explanation:**We first estimate the discount rate with the help of the SML: k

_{S}= 2.75 + 1.24 x 3.75 = 7.40%.

We use the constant growth model to estimate the current value: V

_{0}= (2.75 x 1.065) / (0.074 - 0.065) = 325.42.

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**User Contributed Comments**
7

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

babaj |
c1 --- r-g |

andy4cfa |
Pay attention to calculate the D1=D0*(1+g) |

MUTE |
D1/(r-g) Where D1= Do*(1+g) r= cost of equity according to CAMP re= Rf+B(Rf-RM) |

IBBY84 |
Po = D1/(K-G) D1 = Do*1+g K = Rf+B*(R premium) or Rf+B(RM-RF) K : required rate of return Po: current price Do: last Div D1: next Div |

JepTang |
I think we should pay attention to the statement "constant growth stock..." |

mattg |
Since using CAPM, expected rate of return for stock equals required rate of return, right? |

Ngana |
A general request: Can Analystnotes, please break the questions down in to the different topics ( i.e Fixed income and Corporate governance. Thank you in advance |