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Basic Question 0 of 18
An analyst has gathered the following data to value a firm:
- The firm's beta: 0.9.
- Required rate of return: 8%.
- The firm paid a dividend of $3 in the current year. It is expected to grow by 10% annually for the next three years and 3% per year thereafter.
- Payout ratio: 30%.
What should the stock price be?
User Contributed Comments 4
| User | Comment |
|---|---|
| quanttrader | why can't we use the H model here? |
| quanttrader | ahh I get it, use the H model when supernormal growth is not constant rather converges to the sustainable growth rate; use the multi-period dividend model when supernormal growth is constant. |
| b25331 | To save time at the exam, find cash flows and plug them into the BAII calculator - it will take under a minute y1 = 3.3 (C01) y2 = 3.63 (C02) y3 = 3.993 + (3.993 x 1.03) / (0.08 - 0.05) = 86.253 (C03) I = 8 NPV result = 74.638 |
| jbrecevic | ^ Denom should be Long term growth rate, not .05, (.08-.03) = .05 |
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Learning Outcome Statements
describe the capital allocation process, calculate net present value (NPV), internal rate of return (IRR), and return on invested capital (ROIC), and contrast their use in capital allocation
CFA® 2026 Level I Curriculum, Volume 2, Module 5.