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**CFA Practice Question**

A stock is expected to start paying dividends in 3 years. The dividend is expected to be $0.4 that year. If the required rate of return is 12% and the dividend payout ratio is 40% from year 3 onwards, what is the value of the stock. Return on equity is constant at 15%.

A. $13.24

B. $13.33

C. $10.63

**Explanation:**g = RR x ROE

g = 0.6 x .15 = 0.09

Gordon's growth model: P = (0.4)/(.12-.09) = $13.33

But this is a price in two years, discount back to today: 13.33/1.12

^{2}= $10.63

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**User Contributed Comments**
5

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

neworizon |
good question |

JeffAu |
Forgot to discount |

praj24 |
fair play! forgot to discount too |

EmmaBeale |
same... |

mcfranz |
Anyone know why we're discounting back 2 years instead of 3? "Start paying dividends in 3 years..." I took that to mean we discount it back 3 years... |