Question #19
Reading: Reading 20 Discounted Dividend Valuation
PDF File: Reading 20 Discounted Dividend Valuation.pdf
Page: 7
Status: Correct
Correct Answer: A
Question
An analyst has forecast that Apex Company, which currently pays a dividend of $6.00, will continue to grow at 8% for the next two years and then at a rate of 5% thereafter. If the required return is 10%, based on a two-stage model what is the current value of Apex shares?
Answer Choices:
A. $133.13
B. $127.78
C. $126.24
Explanation
The current value of Apex shares is $133.13:
V0 = [($6 × 1.08) / 1.10] + [($6 × (1.08)2) / 1.102] + [ ($6 × (1.08)2 × 1.05) / (1.102 ×
(0.10 – 0.05))]
= $133.13