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**CFA Practice Question**

Suppose a stock has just paid a $10 per share dividend. The dividend is projected to grow at 10% for the next two years, then 8% for two years, and then 5% indefinitely. The required return is 7%. (Remember that all prices are ex-dividend, that is a period 0 dividend is assumed not to go to the purchaser and is hence not included in the price calculation.)

Growth Rate | 10% | 10% | 8% | 8% | 5% | 5% |

Dividend at beginning of period | 10 | 11 | 12.1 | 13.07 | 14.11 | 14.82|

Time | 0 | 1 | 2 | 3 | 4 | 5 |

Growth Rate | 10% | 10% | 8% | 8% | 5% | 5% |

Dividend at beginning of period | 10 | 11 | 12.1 | 13.07 | 14.11 | 14.82|

What is the stock's value at time 2?

A. 672

B. 659

C. 679

**Explanation:**The dividend at period 4 is $14.11. Its value = 14.11 + 14.82/(0.07 - 0.05) = 755.11 (at period 4). Discount it to get the value at the end of period 3: 13.07 + 755.11/1.07 = 718.78. Then discount this time 3 price by one year to get it back to year 2: 718.78/1.07 = 671.76

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**User Contributed Comments**
1

User |
Comment |
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Hamad333_1 |
why didn't we add the 12.1 before discounting it to year two? |