- 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 company earned $3 a share last year and just paid a dividend of $2 a share. The company's dividends are expected to grow by 8 percent annually for the next two years. An investor with an 11-percent required rate of return expects to sell the stock at $75 two years from now. The maximum amount the investor should be willing to pay for this company's stock (in $) today is closest to ______.

A. 60.68

B. 62.38

C. 64.71

**Explanation:**V = D1 / (1 + k) + D2 / (1 + k)

^{2}+ SP2 / (1 + k)

^{2}

The value of the stock: 2($1.08)/1.11 + 2($1.08)

^{2}/1.11

^{2}+ $75/1.11

^{2}= $64.71.

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