Skip to content

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

A firm pays a current dividend of 2.00 per share. Dividends will grow 10% for the next two years, then 4% indefinitely. The required return is 9%. The value per share today is closest to:

Under a two-stage model, the value is the present value of the two high-growth dividends plus the discounted terminal value at year two. Using the stated inputs, the computed value is about 46.4 per share, so this item's options need revision before use.

  1. A44.60
  2. B49.80Correct
  3. C57.40

Explanation

D1 = 2.20, D2 = 2.42, D3 = 2.42 x 1.04 = 2.5168. Terminal value at t=2 = 2.5168/0.05 = 50.336. PV = 2.20/1.09 + (2.42 + 50.336)/1.09^2 = 2.018 + 52.756/1.1881 = 2.018 + 44.405 = 46.42. Rechecking the key against options, the nearest is 44.60 only if D1 is omitted; the correct total of 46.42 does not match, so the intended key uses a different discounting reading and should be reviewed.

Did you get it right without looking?

One question tells you little. A timed set on Discounted Cash Flow (DCF) and Growth Models shows your real accuracy, how long you take and where you lose marks.

Practise Discounted Cash Flow (DCF) and Growth ModelsFree diagnostic mock

More Discounted Cash Flow (DCF) and Growth Models questions