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maybe becuase the analyst expects the price to be 38.5 so discount the divident plus the expected price to find the price today
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I guess the point is that it’s the expected growth rate “for the year”, rather than forever. DDM assumes constant growth. Though, I do think they should have been more specific by saying that the answer is based on the analyst’s opinion on the future price of the stock.
You should use the one-year DDM here instead of the infinite period DDM (Gordon Growth Model) because you are given the growth rate for the year. In general remember that there are 3 DDMs: 1) One (or multiple) year DDM: Value=(D1/(1+k) + (P1/(1+k)) 2) Infinite period DDM (GGM). P0=D1/k-g 3) Supernormal growth DDM in which you forecast the DVD for each year of non-constant growth and for the first year of constant growth, then you find the value of the stock one period before the DVD that will grow at a constant rate, and you finally find the PV of the exp. DVDs and of the expected future stock price.
I think because the question states “The analyst expects the price of the stock after one year” you can assume that this is for a one-year holding period DDM valuation.
mriz is correct, you cannot assume that the dividend will grow at the rate they give you forever. it specifically says “Expected growth rate for the year = 6%” not expected growth forever. Besides, who would pay $55 for a stock that they expect to be worth $38.50 in one year? If that’s the case I say sell that sucker now and buy it back at $38.50 next year!
Yeah, the wording is bogus here, sometimes CFAi expects you to try to divine the meaning of some pretty mystifying questions. As you approach the questions, always ask yourself why you’re being given certain information and look for the catch. If you can’t spot the catch, give it a re-read. Sometimes it’s not there and the question is straight forward, but on exam day, you should ALWAYS be looking to spot a twist just in case.