Question #12
Reading: Reading 20 Discounted Dividend Valuation
PDF File: Reading 20 Discounted Dividend Valuation.pdf
Page: 5
Status: Incorrect
Correct Answer: A
Your Answer: B
Question
Given that a firm's current dividend is $2.00, the forecasted growth is 7%, declining over three years to a stable 5% thereafter, and the current value of the firm's shares is $45, what is the required rate of return?
Answer Choices:
A. 10.5%
B. 9.8%
C. 7.8%
Explanation
The required rate of return is 9.8%.
r = ($2/$45) [(1 + 0.05) + (3/2)(0.07 – 0.05)] + 0.05 = 0.0980
Since the H-model is an approximation model, it is possible to solve for r directly without
iteration.