CFA Level 1: Dividend Discount Model Calculation

Calculate the Current Value of Common Stock

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Question

Given that next period's dividend will be $2.50, the growth rate of dividends is 7%, and the risk premium on the common stock is 11%, using the infinite period

Dividend Discount Model, what is the current value of the common stock?

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B

The infinite period Dividend Discount Model postulates that the current value of a common stock is equal to D1 / (k - g), where D1 is next period's dividend, k is the required rate of return, and g is the growth rate of dividends. In order to solve for the current value, the required rate of return on the common stock must be known. But only the risk premium is known, which, without the risk-free rate, cannot be used to derive the required rate of return

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