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CFA Level I · CFA Level I Exam · Discounted Cash Flow (DCF) and Growth Models

A company's last dividend was 3.00 per share. Its dividend growth rate is currently 12% and is expected to decline linearly over eight years to a long-term rate of 6%. The required return is 11%. Using the H-model, the value per share is closest to:

The H-model value is about 78.0. With an eight-year decline, H is 4, so the numerator is 3.00 × (1.06 + 4 × 0.06) = 3.90. Dividing by the required return less long-term growth, 0.05, gives 78.0. Using the full eight years instead of half would overstate value.

  1. A63.6
  2. B78.0Correct
  3. C92.4

Explanation

H is half the length of the decline period, so H = 4. Value = D0 × [(1 + gL) + H × (gS − gL)] / (r − gL) = 3.00 × [1.06 + 4 × 0.06] / 0.05 = 3.00 × 1.30 / 0.05 = 78.0. Omitting the extra-growth term gives 63.6, and using H = 8 gives 92.4.

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