DDM

CFA Level I
#1

DDM.

A stock that currently does not pay a dividend is expected to pay its first dividend of $1.00 five years from today. Thereafter, the dividend is expected to grow at an annual rate of 25% for the next three years and then grow at a constant rate of 5% per year thereafter. The required rate of return is 10.3%. What is the value of the stock today?

A. $20.65 B. $20.95 C. $22.72 D. $23.87

what is the correct cash flow:

CF0 - 0 CF1 - 0 F 1=4 CF5 - 1 CF6 - 1.25 CF7 - 1.562 CF8 - 1.93 CF9 - 2.05 + 38.68

oRRRRRR

#2

is the answer c?

#3

A.

CF9 = $2.05 + $40.63

($40.63 = ($2.05 × 1.05) / (10.3% – 5%). Gordon Growth uses _ next year’s _ dividend in the numerator.)

(Or: CF8 = $1.93 + $38.69, and that’s the last cash flow.)

#4

S2000 magician after the 8th year we were told dividend grew at a constant rate of 5%

so D8 =1.93

D9 =1.93(1.05)

V8 ={1.93(1.05)} /0.103-0.05

then you discount it to Vo

#5

Yup.

(Be sure to put parentheses around the (0.103 – 0.05).)

#6

i got it, thank you. There was some calculation mistake in my solution.

#7

thanks i got it