# dividend discount model

from schweser p. 225 number 16 portfolio management book BTW, number 17 is similar to my question. assume that a stock is expected to pay dividends at the end of year 1 and year 2 of 1.25 and 1.56. dividends are expected to grow at a 5% rate thereafter. assuming that ke is 11%, the value of the stock is closest to which of the following? a. 22.3 b. 23.42 c. 24.55 answer: (1.25/1.1) + [1.56 / (.11 - .05)] / 1.1 = 24.55 why not: (1.25/1.1) + [1.56 / (.11 - .05)] / 1.1^2 = 22.26 year 2 dividend should be discounted by 1.1^2 right?

I don’t have the Schweser books around, but from your post it seems like you’re probably correct. Just check their errata and if it’s not in there, write to them.

Check the search function this question has been answered before - i.e. from the same Schweser reading and same questions

C (1.25/1.11) + (1.56/1.11^2) + (1.56 x 1.05) / (0.11 - 0.05) / 1.11^2 = 24.549549

remember that the terminal value is a perpituity, so it gives you a pv for period 1, not period 2. thus, once you have that value, you need to discount it by an additional one period (i.e. 1.1 not 1.1^2).

Good spot there macro. You’re absolutely right