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Basic Question 1 of 7
Sam's Company expects to pay a dividend of $6 per share at the end of year one, $9 per share at the end of year two and then be sold for $136 per share. If the required rate on the stock is 20%, what is the current value of the stock?
B. $105.69
C. $110.00
A. $100.10
B. $105.69
C. $110.00
User Contributed Comments 14
| User | Comment |
|---|---|
| cgeek | 136 + 6 * (1 + 20%) + 9 = x * (1 + 20%) * (1 + 20%) => x = 105.69 |
| jamiejamie | using the formula from the text: d1/(1+k) + d2/(1+k)^2 + sp2/(1+k)^2 =6/1.2 + 9/1.2^2 + 136/1.2^2 =105.69 |
| aroman21 | Forget doing the math by hand, just do a NPV of the future cash flows discounted back at 20% |
| Winner | what are the steps using the Texax Instruments BA II to calculate the NPV of the future Cash flows? |
| cfahanoi | CF function is applied CF0=0 C01=6, F01=1 C02= (9+136) , F02=1 I=20 => NPV = 105.69 |
| missmalik | D_1= $6/SHARE D_2=$9/SHARE Value of the Stock= $6/1.20+ 9/((1,20))^2 +136/((1,20))^2 =5+ 9/1.44+136/1.44 = $5+6.25+94.44 =105.69 |
| rfvo | Nice 1, CfaHanoi!! |
| Kami02 | thanks cfahanoi |
| Tony1234 | Yeah NPV is the way to go. |
| 2014 | Not confidence in cashflow as answer. Just try same method in book for any question. You wont get rite answer. Dividend is divided by r-g =d/r-g and then you go to find pv as per text book. Here you have just directly similar questions i mean only few questions in textbook u get answer thru this method not all |
| davidmort | HP 12C? |
| robbiecow | g CF0 = 0 g CFj = 6 g CFj = 145 i = 20 f NPV = 105.69 |
| Kevdharr | $6.00/1.20 = $5 $9.00/1.20^2 = $6.25 $136.00/1.20^2 = $94.44 $5.00 + $6.25 + $94.44 = $105.69 Easy as ABC, Baby 123 |
| Rachelle3 | thanks Kevdharr much better this way! |
I am happy to say that I passed! Your study notes certainly helped prepare me for what was the most difficult exam I had ever taken.
Andrea Schildbach
Learning Outcome Statements
calculate the value of a common stock using the Gordon growth model and explain the model's underlying assumptions;
calculate the value of non-callable fixed-rate perpetual preferred stock;
calculate and interpret the implied growth rate of dividends using the Gordon growth model and current stock price;
describe strengths and limitations of the Gordon growth model and justify its selection to value a company's common shares;
CFA® 2025 Level II Curriculum, Volume 3, Module 21.