CFA Level 2 – Equity Session 11 – Reading 42 Discounted Dividend Valuation

CFA Level 2 – Equity, Session 11-Reading 42

Discounted Dividend Valuation – LOS g

(Practice Questions, Sample Questions)

1. What is the value of a fixed-rate perpetual preferred share (par value $100) with a dividend rate of 7.0% and a required return of 9.0%?

A) $71.
B) $56.
C) $78. [The value of the preferred is $78: V_0 = ($100par × 7%) / 9% = $77.78]

2. A $100 par, perpetual preferred share pays a fixed dividend of 5.0%. If the required rate of return is 6.5%, what is the current value of the shares?

A) $100.00.
B) $88.64.
C) $76.92. [The current value of the shares is .

92: V0 = ($100 × 0.05) / 0.065 = $76.92]

3. If the value of an 8%, fixed-rate, perpetual preferred share is $134, and the par value is $100, what is the required rate of return?

A) 8%.
B) 7%.
C) 6%. [The required rate of return is 6%: V0 = ($100par × 8%) / r = $134, r = 5.97%]

4. What is the value of a fixed-rate perpetual preferred share (par value $100) with a dividend rate of 11.0% and a required return of 7.5%?

A) $147. [The value of the preferred is $147: V0 = ($100par × 11%) / 7.5% = $146.67]
B) $152.
C) $138.

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