CFA Practice Question

There are 191 practice questions for this study session.

CFA Practice Question

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

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.

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.
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