Question #118
Reading: Reading 20 Discounted Dividend Valuation
PDF File: Reading 20 Discounted Dividend Valuation.pdf
Page: 47
Status: Unattempted
Question
A firm has the following characteristics: Current share price $100.00. One-year earnings $3.50 One-year dividend $0.75. Required return 13%. Justified leading price to earnings 10. Based on the dividend discount model, what is the firm's assumed growth rate?
Answer Choices:
A. 12.4%
B. 8.6%
C. 10.9%
Explanation
The assumed growth rate is 10.9%:
P0 / E1 = ($0.75/$3.50) / (0.13 – g) = 10, g = 10.86%