CFA Practice Question

There are 191 practice questions for this study session.

CFA Practice Question

A common stock pays an annual dividend per share of $2.10. The risk-free rate is 7% and the risk premium for this stock is 4%. If the annual dividend is expected to remain at $2.10, the value of the stock is closest to ______.

A. $19.09
B. $30.00
C. $52.50
Correct Answer: A

User Contributed Comments 7

User Comment
cgeek 2.1 / ( 7% + 4%) = 19.09
brujita94 This should be the value of a prefered stock, not common??
ange It is still a common stock, but the growth rate of dividend is 0%. So instead of D1/(k-g) you have D1/k = 2.1/11% = 19.09
accounting even the Gordon DDM works with g=0
Lavay The key point here is to know that you add both the rf + rp to get the capitalization rate.
jonan203 FYI, preferreds typically have a $25 par value.
houstcarr this also shows how dividend discount models apply absolutely no value to common stock having voting rights, whereas preferred does not. this is not the case in reality
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