Maximum Price Calculation for Stock with Dividend Discount Model | CFA Level 1 Exam Preparation

Max Price Calculation for Stock with Dividend Discount Model

Prev Question Next Question

Question

A stock that you are considering for purchase has the following characteristics:

Current dividend $2.00 -

Expected dividend in 1 year $2.20

Long term growth rate of dividends 10%

Required rate of return 14%

Using the infinite period Dividend Discount Model, what is the maximum price that you would pay for this stock?

Answers

Explanations

Click on the arrows to vote for the correct answer

A. B. C. D. E. F.

E

The infinite period Dividend Discount Model indicates that:

Value = (Dividend for period 1)/(k-g) where k is the required rate of return and g is the growth rate. In this case Value = ($2.20)/(.16-.10) = $2.20/.04 = $55.

Prev Question Next Question