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Basic Question 0 of 12
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 |
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Learning Outcome Statements
explain the rationale for using price multiples to value equity, how the price to earnings multiple relates to fundamentals, and the use of multiples based on comparables
calculate and interpret the following multiples: price to earnings, price to an estimate of operating cash flow, price to sales, and price to book value
CFA® 2026 Level I Curriculum, Volume 3, Module 8.