Question #109

Reading: Reading 20 Discounted Dividend Valuation

PDF File: Reading 20 Discounted Dividend Valuation.pdf

Page: 43

Status: Unattempted

Part of Context Group: Q109-111 First in Group
Shared Context
- Using the Gordon growth model (GGM), what is the equity risk premium? A) 2.75%. B) 3.25%. C) 5.50%.
Question
Davidson needs to determine if the shares of Wellborn are currently undervalued or overvalued in the market relative to the shares' fundamental value. The estimated fair value of Wellborn shares, using a two-period dividend discount model (DDM), is:
Answer Choices:
A. $27.69
B. $27.58
Explanation
The value of Wellborn using a two-period DDM is: ($1.25 / 1.095) + (($1.45 + $27.50) / 1.0952) = $25.29
Actions
Practice Flashcards