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: kS = 2.75 + 1.24 x 3.75 = 7.40%.
We use the constant growth model to estimate the current value: V0 = (2.75 x 1.065) / (0.074 - 0.065) = 325.42.
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 |