CFA Practice Question

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
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
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