### CFA Practice Question

There are 191 practice questions for this study session.

### 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

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.