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Basic Question 5 of 12
What would Jackie pay for a stock that is expected to pay a $1.50 dividend in one year if the expected dividend growth rate is 3% and she requires a 16% return on her investment? Jackie would pay:
B. $12.43
C. $11.54
A. $13.14
B. $12.43
C. $11.54
User Contributed Comments 10
| User | Comment |
|---|---|
| Rajain | Why C 1.5/(0.16-0.03) = 11.5384 |
| cfahanoi | Expected devidend = D1 => V = 1.5/(.16-.03) = 11.54 |
| rfvo | Remember expected dividend, so no need to multiply growth. Current dividend multiply by growth rate. |
| fmhp | Thank you rfvo: good hint! |
| moneyguy | tricky one. |
| Jamberto | wouldn't it be: (D*1+G)/(R-G) = (1.50*1.03)/(.16-.03) = 11.88 ??? |
| jonan203 | jamberto: no, 1.5 is the future dividend that has NOT been paid, which implies that the previous dividend was 1.45. [1.45(1.03)] / (.16 - .03) = 11.54 |
| tochiejehu | D1 =Expected dividend=1.50 and apply d constant growth model |
| Inaganti6 | hahaha this is tricky ? |
| MathLoser | No, it is not. |
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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.