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Basic Question 1 of 7
An analyst has gathered the following data to value a firm:
- The firm's beta: 0.9.
- Required rate of return: 8%.
- The firm paid a dividend of $3 in the current year. It is expected to grow by 10% annually for the next three years and 3% per year thereafter.
- Payout ratio: 30%.
What should the stock price be?
User Contributed Comments 4
| User | Comment |
|---|---|
| quanttrader | why can't we use the H model here? |
| quanttrader | ahh I get it, use the H model when supernormal growth is not constant rather converges to the sustainable growth rate; use the multi-period dividend model when supernormal growth is constant. |
| b25331 | To save time at the exam, find cash flows and plug them into the BAII calculator - it will take under a minute y1 = 3.3 (C01) y2 = 3.63 (C02) y3 = 3.993 + (3.993 x 1.03) / (0.08 - 0.05) = 86.253 (C03) I = 8 NPV result = 74.638 |
| jbrecevic | ^ Denom should be Long term growth rate, not .05, (.08-.03) = .05 |
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
explain the assumptions and justify the selection of the two-stage DDM, the H-model, the three-stage DDM, or spreadsheet modeling to value a company's common shares;
describe terminal value and explain alternative approaches to determining the terminal value in a DDM;
calculate and interpret the value of common shares using the two-stage DDM, the H-model, and the three-stage DDM;
explain the use of spreadsheet modeling to forecast dividends and to value common shares;
evaluate whether a stock is overvalued, fairly valued, or undervalued by the market based on a DDM estimate of value.
CFA® 2025 Level II Curriculum, Volume 3, Module 21.