Common Stock Valuation | Dividend Discount Model | CFA Level 1 Exam Prep

Calculate Common Stock Value using Dividend Discount Model - CFA Level 1 Exam Prep

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Question

Given that this period's dividend is $3, the required rate of return is 16%, and the dividend growth rate is 4%, what is the current value of the common stock (using the infinite period Dividend Discount Model)?

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A. B. C. D. E.

D

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. Next period's dividend is equal to this period's dividend multiplied by the dividend growth rate. In this question, next period's dividend is 3 x 1.04 = 3.12. The common stock is worth 3.12 / (0.16 - 0.04) = $26.

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