CFA Level I · CFA Level I Exam · Introduction to Equity Valuation
An analyst values a firm with a constant-growth model. Next year's dividend is 3.00, the required return is 9%, and the growth rate is 4%. The stock trades at 52. The intrinsic value and the resulting conclusion are most likely:
Using the constant-growth model, value equals 3.00 divided by (9% minus 4%), which is 60. Because intrinsic value of 60 exceeds the market price of 52, the stock is undervalued.
- A60, and the stock is overvalued
- B60, and the stock is undervaluedCorrect
- C75, and the stock is overvalued
Explanation
Value = D1/(r-g) = 3.00/(0.09-0.04) = 60. Since 60 exceeds the market price of 52, the stock is undervalued. Dividing by the required return alone gives 33.3, and 75 comes from using a wrong spread, so neither fits.
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