- CFA Exams
- CFA Exam: Level I 2021
- 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**

Sam's Company expects to pay a dividend of $6 per share at the end of year one, $9 per share at the end of year two and then be sold for $136 per share. If the required rate of return on the stock is 20%, what is the current value of the stock?

B. $105.69

C. $110.00

A. $100.10

B. $105.69

C. $110.00

Correct Answer: B

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**User Contributed Comments**
14

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

cgeek |
136 + 6 * (1 + 20%) + 9 = x * (1 + 20%) * (1 + 20%) => x = 105.69 |

jamiejamie |
using the formula from the text: d1/(1+k) + d2/(1+k)^2 + sp2/(1+k)^2 =6/1.2 + 9/1.2^2 + 136/1.2^2 =105.69 |

aroman21 |
Forget doing the math by hand, just do a NPV of the future cash flows discounted back at 20% |

Winner |
what are the steps using the Texax Instruments BA II to calculate the NPV of the future Cash flows? |

cfahanoi |
CF function is applied CF0=0 C01=6, F01=1 C02= (9+136) , F02=1 I=20 => NPV = 105.69 |

missmalik |
D_1= $6/SHARE D_2=$9/SHARE Value of the Stock= $6/1.20+ 9/((1,20))^2 +136/((1,20))^2 =5+ 9/1.44+136/1.44 = $5+6.25+94.44 =105.69 |

rfvo |
Nice 1, CfaHanoi!! |

Kami02 |
thanks cfahanoi |

Tony1234 |
Yeah NPV is the way to go. |

2014 |
Not confidence in cashflow as answer. Just try same method in book for any question. You wont get rite answer. Dividend is divided by r-g =d/r-g and then you go to find pv as per text book. Here you have just directly similar questions i mean only few questions in textbook u get answer thru this method not all |

davidmort |
HP 12C? |

robbiecow |
g CF0 = 0 g CFj = 6 g CFj = 145 i = 20 f NPV = 105.69 |

Kevdharr |
$6.00/1.20 = $5 $9.00/1.20^2 = $6.25 $136.00/1.20^2 = $94.44 $5.00 + $6.25 + $94.44 = $105.69 Easy as ABC, Baby 123 |

Rachelle3 |
thanks Kevdharr much better this way! |