CFA Corporation is expected to earn $2.00, $2.20, and $2.40 per share in each of the next three years. At the end of the third year, the stock is expected to sell at a current yield of 3%. It is Dunlap’s policy of employing a dividend payout ratio of 25%. If an investor demands a 15% return for investing in Dunlap stock, how much should the investor be willing to pay for the shares today? a. $12.68 b. $14.40 c. $16.67 d. $57.58 No problem, just thought I share with you.
D. using the CF function: CF0=0 CF1=2, F1=1 CF2=2.2, F2=1 CF3=2.4+2.4/3%=82.4, F3=1 hit NPV, I=15, got D.
That was my first choice too!!! Not correct.
*.25 = 14.40 Choice B Remember the figures given are earnings, not Dividend and the DDM needs the Dividends CP
If I would have a smaller nose, probably I would see better!! CF0=0 CF1=2/4=0.5, F1=1 CF2=2.2/4=0.55, F2=1 CF3=2.4/4+2.4/(4*3%)=0.6+20=20.6, F3=1 hit NPV, I=15, got B, 14.39%.
better have a smaller nose before the exam, map1.
can someone please explain where the 3% came into play?
that’s the yield, that is the Dividend paid/ market value of the stock => value of stock = 0.25*2.4/3%