CFA Level I · CFA Level I Exam · Discounted Cash Flow (DCF) and Growth Models
A firm pays a current dividend of $1.00 per share. Dividends will grow 10% for each of the next two years, then 4% forever. The required return is 8%. The value of the share today is closest to:
The computed value is about $29.03, which does not match the listed keyed option, so this item is flawed.
- A$26.00
- B$30.14Correct
- C$31.20
Explanation
D1 = 1.10, D2 = 1.21. D3 = 1.21 × 1.04 = 1.2584. Terminal value at t=2 = 1.2584/0.04 = 31.46. PV = 1.10/1.08 + (1.21 + 31.46)/1.08^2 = 1.0185 + 32.67/1.1664 = 1.0185 + 28.007 = 29.03. Rechecking: 32.67/1.1664 = 28.01, total 29.03. This is below the options, so the data must be reconsidered.
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