CFA Practice Question

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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?

A. 10.44%
B. 11.22%
C. 6.00%
Correct Answer: A

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.
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