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Basic Question 2 of 12
Which of the following amounts is closest to what should be paid for Aerodynamic Common stock? Aerodynamic has just paid a dividend of $4.50. These dividends are expected to grow at a rate of 5% forever. The risk of this company suggests that future cash flows should be discounted at a rate of 9%.
B. $118.
C. $123.
A. $113.
B. $118.
C. $123.
User Contributed Comments 16
| User | Comment |
|---|---|
| haarlemmer | $123 stands for the expected dividend! |
| ipallete | The formula needs the NEXT dividend (not yet paid). If we know last dividend and growth rate we can get D1=D0(1+g). |
| jade | But how do you know that you have to use the infinite growth model |
| steved333 | Don't forget to apply the (1+g) to the $123. |
| bmeisner | Hmmm Jade, how do you know to use infinite growth model? Maybe because it says the word forever right in the sentence, ever think of that? |
| kutta2102 | What's with the sarcasm bmeisner? Haven't you ever made a misread a question? |
| rfvo | Anyone know the BA workings? |
| rfvo | LOL, cant believe i posted that...6 months down the line and i dont need my BA any more, takes way to much time. |
| CFALucille | why do you multiple number by 1.05? I thought formula was V = D/k-g |
| IvanTG | Lucille, the question is relating to current dividend value not future, therefore we need to adjust it for the estimated growth of 5%...I got it wrong too ;-) |
| thekobe | Lucille you have to apply V=D*(1+g)/k-g |
| johntan1979 | Yup, got me too. Next period's dividend. |
| jonan203 | you are paying for FUTURE dividends, not dividends that have already been paid. if a stock pays a $5 dividend yesterday and the assumed rate of dividend growth is 5%, you have to discount the future dividend $5(1.05) by the spread between the discount and growth rate. discount the future $5.25, not the past $5.00 |
| davidmort | I got 117 |
| tochiejehu | use d Constant Growth formular to get the answer |
| kseeba17 | Just learn how to use a normal calculator people, that way you actually understand it. |
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Martin Rockenfeldt
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.