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Basic Question 1 of 4
A common stock pays an annual dividend per share of $2.10. The risk-free rate is 7% and the risk premium for this stock is 4%. If the annual dividend is expected to remain at $2.10, the value of the stock is closest to ______.
B. $30.00
C. $52.50
A. $19.09
B. $30.00
C. $52.50
User Contributed Comments 7
| User | Comment |
|---|---|
| cgeek | 2.1 / ( 7% + 4%) = 19.09 |
| brujita94 | This should be the value of a prefered stock, not common?? |
| ange | It is still a common stock, but the growth rate of dividend is 0%. So instead of D1/(k-g) you have D1/k = 2.1/11% = 19.09 |
| accounting | even the Gordon DDM works with g=0 |
| Lavay | The key point here is to know that you add both the rf + rp to get the capitalization rate. |
| jonan203 | FYI, preferreds typically have a $25 par value. |
| houstcarr | this also shows how dividend discount models apply absolutely no value to common stock having voting rights, whereas preferred does not. this is not the case in reality |
I am using your study notes and I know of at least 5 other friends of mine who used it and passed the exam last Dec. Keep up your great work!
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Learning Outcome Statements
calculate the intrinsic value of a non-callable, non-convertible preferred stock
CFA® 2024 Level I Curriculum, Volume 3, Module 8.