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Basic Question 1 of 4
A common stock pays an annual dividend per share of $2.10. The risk-free rate is 7% and the risk premium for this stock is 4%. If the annual dividend is expected to remain at $2.10, the value of the stock is closest to ______.
B. $30.00
C. $52.50
A. $19.09
B. $30.00
C. $52.50
User Contributed Comments 7
| User | Comment |
|---|---|
| cgeek | 2.1 / ( 7% + 4%) = 19.09 |
| brujita94 | This should be the value of a prefered stock, not common?? |
| ange | It is still a common stock, but the growth rate of dividend is 0%. So instead of D1/(k-g) you have D1/k = 2.1/11% = 19.09 |
| accounting | even the Gordon DDM works with g=0 |
| Lavay | The key point here is to know that you add both the rf + rp to get the capitalization rate. |
| jonan203 | FYI, preferreds typically have a $25 par value. |
| houstcarr | this also shows how dividend discount models apply absolutely no value to common stock having voting rights, whereas preferred does not. this is not the case in reality |
I am using your study notes and I know of at least 5 other friends of mine who used it and passed the exam last Dec. Keep up your great work!
Barnes
Learning Outcome Statements
describe the choices and issues in index construction and management
compare the different weighting methods used in index construction
calculate and analyze the value and return of an index given its weighting method
describe rebalancing and reconstitution of an index
CFA® 2026 Level I Curriculum, Volume 3, Module 2.