- 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**

An analyst gathers the following data to determine the attractiveness of a company's common stock:

Dividends per share in 2013: $3

Expected return on the market: 17%

Expected nominal risk-free return: 9%

Stock's beta: 1.8

Stock's market price as of 1 January 2014: $19

Dividends per share in 2007: $2

Dividends per share in 2013: $3

Expected return on the market: 17%

Expected nominal risk-free return: 9%

Stock's beta: 1.8

Stock's market price as of 1 January 2014: $19

Using the constant-growth dividend discount model, the stock's intrinsic value is closest to ______.

A. $14.38

B. $16.87

C. $19.57

**Explanation:**g = growth rate of dividends: [(3/2)

^{(1/6)}] - 1= 7%

Alternatively, PV = 2, FV = -3 n= 6, compute I/Y; k = 9 + 1.8 (17 - 9) = 23.4%

V = 3(1.07) / (0.234-0.07) = 19.57.

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**User Contributed Comments**
7

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

navarro |
Can someone please explain this one? |

navarro |
The formula: D1/Kc-Gc They used the CAPM to find the Kc |

GBolt93 |
Used geometric average to find growth rate, CAPM to find required rate of return, and then dividend discount to value stock |

krispy4 |
the alternative calculation is definitely the easier of the two, for the growth rate. |

nmech1984 |
What is the 3(1.07) ?? any help? |

nmech1984 |
We are trying to calculate the V at the end of 2013? Then why 3*1.07? Shouldn't it be just 3? |

DRamirez |
2013 dividend is D0. in the Gordon Growth Model, you use D1. The value of a stock, V0 = D1 / (r -g). The curriculum actually says we should be careful here as using D0 is a common mistake. |