#### Howdy, Stranger!

It looks like you're new here. If you want to get involved, click one of these buttons!

#### CFA Events Calendar

View full calendar

#### CFA Events Calendar

View full calendar

# Question of the Week - Equity

Des Moines, IA, USAPosts: 211 Sr Associate
edited June 2015
You are provided the following information about a stock:
• Current price: \$36.78
• Current annual dividend: \$1.70
• Expected dividend growth rate: 4.5% for the next 2 years, 1.6% thereafter

If the required rate of return on this stock is 8.5%, the intrinsic stock value according to the two-stage dividend discount model is closest to:

## Question of the Week - Equity 11 votes

\$25
0%
\$26
90%
\$27
9%
1 vote

• Des Moines, IA, USAPosts: 211 Sr Associate
\$26

The dividends each year are:

D1 = 1.70 * 1.045 = 1.7765

D2 = 1.70 * 1.045^2 = 1.8564

D3 = 1.70 * 1.045^2 * 1.016 = 1.8861

The terminal value at t = 2 is:

V2 = 1.8861 / (0.085 – 0.016) = 27.3354

The intrinsic value of the stock at t = 0 is:

V0 = 1.7765 / 1.085 + 1.8564 / 1.085^2 + 27.3354 / 1.085^2 = 26.43