- 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**

A share of stock is expected to pay a dividend of $1.00 one year from now, with growth at 5% thereafter. In the context of a dividend discount model, the stock is correctly priced today at $10. According to the single-stage, constant-growth dividend discount model, if the required return is 15%, the value of the stock two years from now should be ______.

A. $11.03

B. $12.10

C. $13.23

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**User Contributed Comments**
13

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

Yuyan |
D3=1*1.05*1.05 K-g=(0.15-0.05) Price at Y2 = D3/(k-g)=11.03 |

murli |
Good one. Asked in price two years from now = D3/(k-g); Do not discount it, as two years price from now is undiscounted! |

PedroEdmundo |
Don't really agree since the price 2 years from now discounted should the price of today, no? |

pao13 |
10=(1/1.15)+(1.05/1.3225)+(P2/1.3225)...solve for P2 |

CoffeeGirl |
Good. Look at D1 = 1, D2 = 1x1.05, D3 = 1x1.05x1.05 calculating the P2 = d3/ (k-g) |

RNAN |
Answer should be C) ($13.23). Value today is $10, so if it is fairly priced today and r=15% then in two years the stock will be worth ($10)*(1 + r)^2=$13.23 |

RNAN |
Sorry, my answer above includes the dividents recieved and re-invested. The answer is A) ($11.03). |

volkovv |
Good question! |

cahiz84 |
Watch out, it says two years from now!!! not current value |

mountaingoat |
doesn't D1 = dividend 1 yr from now and D2 = dividend 2 yrs from now? why not D2/(k-g)? can someone please explain what i'm missing? |

heinzlive |
The value in two years from now (end of year 2)is calculated with the dividend of year three (= 1*1,05^2) Explanation in reading 46, page 316 point 5.2. |

mishis |
Oh, the Price today is Div paid one yr from today. mountaingoat: Value 2 yrs from now is beg of year 2. However, this value includes div from end of yr 2. |

broadex |
pa013 is right |