CFA Level I · CFA Level I Exam · Discounted Cash Flow (DCF) and Growth Models
An investor plans to hold a share for one year. She expects a dividend of $3.00 at year-end and a selling price of $53.00 at that time. The required return is 12%. The current value of the share is closest to:
The share is worth about $50.00. The expected year-end dividend of $3.00 and the sale price of $53.00 total $56.00, and discounting that one year at the 12% required return gives $56.00 divided by 1.12, or $50.00.
- A$46.43
- B$50.00Correct
- C$56.00
Explanation
V0 = (3.00 + 53.00)/1.12 = 56.00/1.12 = $50.00. Omitting the discounting gives $56.00. Discounting only the price gives $47.32, and discounting only the dividend plus the undiscounted price does not match any sensible approach; $46.43 comes from discounting by 1.12 twice incorrectly... in practice it is a flawed result.
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.
More Discounted Cash Flow (DCF) and Growth Models questions
- An analyst values a mature utility using the dividend discount model. Which cash flow does the model most likely discount to estimate the in…
- A company has a constant ROE of 10% and currently retains 30% of earnings. Management wants to double its sustainable growth rate without ch…
- Holding return on equity constant and positive, a firm that raises its dividend payout ratio will most likely experience:
- A company is expected to pay a dividend of $2.40 per share next year. Dividends are expected to grow at a constant 4% per year indefinitely,…
- A firm's FCFF is 300 and interest expense is 40, with a tax rate of 25%. Net borrowing during the year is 50. All figures are in millions of…
- A company is expected to pay a dividend of $2.40 per share next year, and dividends are expected to grow at 4% a year indefinitely. The requ…