Question #39
Reading: Reading 20 Discounted Dividend Valuation
PDF File: Reading 20 Discounted Dividend Valuation.pdf
Page: 17
Status: Correct
Correct Answer: A
Question
CAB Inc. just paid a current dividend of $3.00, the forecasted growth is 9%, declining over four years to a stable 6% thereafter, and the current value of the firm's shares is $50, what is the required rate of return?
Answer Choices:
A. 10.5%
B. 9.8%
C. 12.7%
Explanation
The required rate of return is 12.7%.
r = ($3 / $50)[(1 + 0.06) + (4 / 2)(0.09 − 0.06)] + 0.06 = 12.7%
Since the H-model is an approximation model, it is possible to solve for r directly without
iteration.