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Basic Question 7 of 12
WTRS Inc.'s common stock is currently selling for $66.25 per share. You expect the next dividend to be $5.30 per share. If the firm has a dividend growth rate of 4%, what is its cost of equity?
B. 14.1%
C. 12.0%.
A. 13.9%
B. 14.1%
C. 12.0%.
User Contributed Comments 11
| User | Comment |
|---|---|
| Arif99 | =((5.30/66.25)+.04)*100 |
| Indira | 66.25=5.30/(k-0.04)=>12% |
| Nikita | how are you getting 12% from the above 66.25 = 5.3/(k-0.04) = 0.04 |
| merrick | 5.3/66.25=.08 .08+.04=.12 |
| johntan1979 | By this question, you should get it right already (assuming you did the previous 9 questions). Otherwise, lots of luck to you for the actual exam. |
| quanttrader | if you can't get this, then sorry to say you're screwed! |
| jonan203 | nikita, HP12c like this: 5.3 <enter><enter> .04 <enter> 66.25 <times><plus> 66.25 <divide> = 12% |
| praj24 | I'm screwed! Back to LOS... I'll be back! |
| praj24 | ^^^ this fool needs to read the LOS next time! |
| Inaganti6 | @johntan1979 You kept making superb comments all through most of the problems. Yet, the entire Equity section accounts for ~ 10% on the exam. I got this question right but the lapse in your judgement is surprising and in some ways disappointing. |
| workinehg | Assuming the stock is valued fairly? What if the stock is overvalued/undervalued. The formula is to calculate the intrinsic value and not market price. |
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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.