Dividend Discount Model Question

CFA Level I
#1

Brandy Clark, CFA, has forecast that Aceler, In. will pay its first dividend two years from now in the amount of $1.25. For the following year she forecasts a dividend of $2.00 and expects dividends, to increase at an average rate of 7% for the foreseeable future after that. If the risk-free rate is 4.5%, the market risk premium is 7.5%, and Aceler’s beta is 0.9, Clark would estimate the current value of Aceler shares as being cloest to: A. $37 B. $39 C. $47

#2

Good question…

#3

B.) 39 dollars? hkese Wrote: ------------------------------------------------------- > Brandy Clark, CFA, has forecast that Aceler, In. > will pay its first dividend two years from now in > the amount of $1.25. For the following year she > forecasts a dividend of $2.00 and expects > dividends, to increase at an average rate of 7% > for the foreseeable future after that. If the > risk-free rate is 4.5%, the market risk premium is > 7.5%, and Aceler’s beta is 0.9, Clark would > estimate the current value of Aceler shares as > being cloest to: > > A. $37 > B. $39 > C. $47

#4

I got 38.45…I hate having rounding errors!

#5

Ke = 4.5% + .9(7.5%) Ke = 11.25% P0 = (1.25 / 1.1125^2) + [(2 / (.1125 - .075)) / 1.1125^2] P0 = (1.25 / 1.1125^2) + (47.06 / 1.1125^2) P0 = $39

#6

i thought B as well, defeinitely not C. whats the discount rate?

#7

why do you use Ke to discount it but not the rfr?

#8

ok, you always use Ke to discount back in this model i remember now.

#9

Schweser solution: The required rate of return on Aceler shares is 4.5 + 0.9(7.5) = 11.25%. The dividend at t = 3, $2.00, is expected to grow at. 7% for the foreseeable future so the DDM value of Aceler shares at r = 2 is 2/(0.1125 - 0.07) = 47.06. The t 11. D = 0 value df rhe shares is (47.06 + 1.25)/1.1125 2 = $39.03. Ke represents required rate of return. I would be investing in Treasury Securities not Aceler if i wanted RFR. Since i need a higher rate to part with my money which Ke represents, it becomes the discount rate.

#10

I am pretty sure there will be a question like this on the 5th.

#11

seems like there are too many of us online :smiley: