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Basic Question 4 of 16
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%
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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Learning Outcome Statements
explain the rationale for using present value models to value equity and describe the dividend discount and free-cash-flow-to-equity models
calculate and interpret the intrinsic value of an equity security based on the Gordon (constant) growth dividend discount model or a two-stage dividend discount model, as appropriate
identify characteristics of companies for which the constant growth or a multistage dividend discount model is appropriate
explain advantages and disadvantages of each category of valuation model
CFA® 2024 Level I Curriculum, Volume 3, Module 8.