- CFA Exams
- CFA Level I Exam
- Topic 5. Equity Investments
- Learning Module 41. Equity Valuation: Concepts and Basic Tools
- Subject 3. Present Value Models: The Dividend Discount Model

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**CFA Practice Question**

Suppose a firm is expected to pay a dividend of $2.10 per share in one year. This dividend, along with firm earnings, etc., is expected to grow at a rate of 5% forever. If the current market price for a share of the firm is $38.62, what is the cost of equity?

B. 11.22%

C. 6.00%

A. 10.44%

B. 11.22%

C. 6.00%

Correct Answer: A

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**User Contributed Comments**
12

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

cgeek |
2.1 / 38.62 + 5% = 10.44 % |

sarath |
Here 2.1 is the D1 expected dividend at the end of one periord... |

ljamieson |
cost of equity <=> exp'd return? |

carnival |
yes. |

chamad |
In other words we have to resolve for the required rate of return(k) |

Mavizo |
Sarath, does it mean that the fact that 2.1 is the expected dividend it has already taken into consideration (1 + g)? |

kutta2102 |
Mavizo: Yes, if the expected dividend is given, the 1+g is already taken into consideration. Remember that the DDM formula is the present value of all future dividends. Therefore the first dividend that will be discounted is D1 which is equal to D0(1+g) |

tochiejehu |
use the constant growth model and make the required return subject of formular |

khalifa92 |
it will pay dividend in one year so it is D(1+g) |

workinehg |
Great explanation kutta2102 |

b25331 |
P0 = D1 / (r-g) 38.62 = 2.1 / (r - 0.05) -> solve for r r = 10.44% |

MathLoser |
These questions are too eazy I can solve it with my eyes closed. |