CFA got it wrong, or did I miss something? solution, something, required, question

MeteorShower

Reading 56 (P152 question 4).

The question says "Over the long-run, you expect dividends for BBC in Problem 2 above to grow at 8% and u require 11% . . . .

In 2 the dividends was correctly calculated as (1) last year to be $6 and (2) this year to be $6.6, if the required rate has been changed to 11% why is the solution for D1$6*1.08/0.03 instead of $6.6*1.08/0.03.

My solution was $237,6. Did I miss something in the question or the solution.

Londonrocks

required rate is a entirely different thing than growth rate
required rate is the discount rate
(6*1.08)/(.11-.08) is correct

Maddin

PKJ, I agree with you. I believe it's 6.6*1.08 on top, since you use the dividend for the period after the current one for the Gordon Growth Model.

MonkeyBusiness

cfagoal2 , I fully understand that required rate and g is not the same but your are not answering the question.

CFA used D0 instead of D1 and they had calculated D1 as $6.6 in the question 2 they are refering to in question 4, in my opinion their solution is wrong.

Thanks NYCAalyst86, I thought I was missing something

Bluetick1010

Here is another one I think is wrong.

Sam's Company expects to pay a dividend of $6 per share at the end of the year, $9 per share at the end of the next two years and then be sold for $136 per share. If the required rate on the stock is 20%, what is the current value of the stock

A) $100.1
B) 105.69
C) 110.00

Book answer is "B"

My answer is "None of the above"

Book solution is 6/1.2+9/1.2^2+136/1.2^2=105.69

My solution is 9/1.2+9/1.2^2+136/1.2^2=108.194

kasinkei

Book is right

D1 = 6 -> see the END OF THE YEAR.

So you are at time 0 when they have not given you a dividend. At the end of the year - means D1 = 6.

Does that now make sense in light of the answer?

CP

Jolyn

I just looked at the question in the book. The book is correct.

You ignore the back that it will earn $11 next year. You expect it to earn $10.8 next year, not $11.

nitoha

Shouldn't it be 6/1.2+9/1.2^2+145/1.2^3? Did I misinterpret the question?

burnsy562000

at the end of year 3 it is sold for 136. So though there is a 9$ dividend at the end of year 3 it is reflected in the P3 already.

CP

eagles_dare13

I think the question can be clearer. Most of the time when someone said the stock is sold for $x, we will assume $x is the market price i.e. excluding any dividends gained.