CFA Level 1: Infinite Period Dividend Discount Model

Infinite Period Dividend Discount Model

Prev Question Next Question

Question

You are going to hold a stock for an infinite amount of time. The current dividend is $1 per share and is expected to grow at 15% a year. Your long run required return is 20%. Using the infinite period dividend discount model calculate the value of the stock.

Answers

Explanations

Click on the arrows to vote for the correct answer

A. B. C. D.

B

g = .15 k = .20 Dividend = 1.15 x $1.00 = $1.15

V = 1.15/(.20 - .15) = $23.

To calculate the value of the stock using the infinite period dividend discount model, we need to use the formula:

Value of stock=DividendRequired return - Dividend growth rate\text{Value of stock} = \frac{\text{Dividend}}{\text{Required return - Dividend growth rate}}

Given: Dividend = $1 per share Dividend growth rate = 15% Required return = 20%

Plugging these values into the formula, we get:

Value of stock=$10.20−0.15\text{Value of stock} = \frac{\$1}{0.20 - 0.15}

Simplifying the denominator:

Value of stock=$10.05\text{Value of stock} = \frac{\$1}{0.05}

Value of stock=$20\text{Value of stock} = \$20

Therefore, according to the infinite period dividend discount model, the value of the stock is $20.

None of the provided answer choices match the calculated value of $20, so the correct answer would be A. none of these answers.

Prev Question Next Question