- CFA Exams
- CFA Level I Exam
- Study Session 10. Equity Valuation (2)
- Reading 27. Discounted Dividend Valuation
- Subject 8. Multistage dividend discount models

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**CFA Practice Question**

Beth is evaluating HRL Co. which has been growing at the annual rate of 15% for the last 5 years. Here is her forecast of the company's future dividend growth trend.

After considerable study, she has decided to use the following information in her valuation (as of beginning of 2005):

- Beta: 0.8.
- 2004 dividend: $5.
- The risk-free rate: 4%.
- Expected equity premium: 6%.

What is the value of the HRL's stock?

A. 211.47.

B. 205.23.

C. 222.33.

**Explanation:**The company is expected to grow at a constant rate (15%) during the next two years. In year 2007 the growth falls to 6% and stabilizes at this rate. A company with this growth pattern can be valued using the two-stage DDM. HRL's required rate of return is r

_{HRL}= r

_{f}+ beta x market premium = 0.04 + 0.8 x 0.06 = 0.088, or 8.8%.

The following table demonstrates the two-stage DDM valuation of HRL:

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**User Contributed Comments**
2

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

danlan2 |
Should add D1 and D2 to TV |

ThePessimist |
Remember that the TV is calculated for the end of 2006, and thus is only discounted 2 years. |