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Basic Question 9 of 12
A common stock pays an annual dividend per share of $2.10. The risk-free rate is 7 percent, and the risk premium for this stock is 4 percent. If the annual dividend is expected to remain at $2.10, the value of the stock is closest to:
B. $30.00.
C. $52.50.
A. $19.09.
B. $30.00.
C. $52.50.
User Contributed Comments 7
| User | Comment |
|---|---|
| cgeek | 2.1 / ( 7% + 4%) = 19.09 |
| brujita94 | This should be the value of a prefered stock, not common?? |
| ange | It is still a common stock, but the growth rate of dividend is 0%. So instead of D1/(k-g) you have D1/k = 2.1/11% = 19.09 |
| accounting | even the Gordon DDM works with g=0 |
| Lavay | The key point here is to know that you add both the rf + rp to get the capitalization rate. |
| jonan203 | FYI, preferreds typically have a $25 par value. |
| houstcarr | this also shows how dividend discount models apply absolutely no value to common stock having voting rights, whereas preferred does not. this is not the case in reality |
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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.