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Basic Question 3 of 12
The current price of Galaxy Electronics stock is $50.00. Dividends are expected to grow at 7% indefinitely and the most recent dividend was $1. What is the required rate of return on Galaxy Electronics stock?
B. 9.3%
C. 11.2%
A. 9.1%
B. 9.3%
C. 11.2%
User Contributed Comments 11
| User | Comment |
|---|---|
| cgeek | why A ? 50 = 1 / (x - 7%) x = 9 % |
| jamiejamie | because the $1 dividend is the MOST RECENT. The dividend value in the infinite DDM formula is the value of the divident after one year. So you have to put 1.07 in the numerator, not $1. When you use that value, you will get 9.0914 |
| jamiejamie | sorry, you will get 0.0914! (9.14%) |
| morpheus918 | Answer is $9. $1 should be in the dividend, not 1.07 because $50 is the price now, not a year in the future. |
| morpheus918 | Oops! Where's the delete key? Jamie's right, 9.14% is correct. |
| accounting | the working is (1.07/50)+.07 all by 100 |
| Rotigga | $50 = $1(1+0.07)/(r-0.07); 50r - 3.5 = 1 + 0.07; 50r = 4.57; r = 0.0914 = 9.14% |
| missmalik | Value for indefinate model is = Do(1+g)/k-g 50=1.07/k-7% multiply both side by (k-.07)= 50k-3.5=1.07 50k=1.07+3.5 k=4.57/50=.0914*100= 9.14% |
| 11Blaise | Value for indefinate model is = Do(1+g)/k-g 50=1.07/k-7% (D1/EPS)=.0214 k-g=.0214 .0214+G=K k=.0914 |
| loisliu88 | it's the cost of common stock-dividend discount model: r= D1/P + g |
| tochiejehu | use the constant growth formular and make r d subject of formular |
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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.