Page 16 - FINAL CFA SLIDES DECEMBER 2018 DAY 14
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Session Unit 14:
49. Equity Valuation: Concepts and Basic Tools
Example: A firm with no current dividend: A firm currently pays no dividend but is expected to pay a dividend at
the end of Year 4. Year 4 earnings are expected to be $1.64, and the firm will maintain a pay-out ratio of 50%.
Assuming a constant growth rate of 5% and a required rate of return of 10%, estimate the current value of this
stock.
Answer:
The first step is to find the value of the stock at the end of Year 3. Remember, P is the present value of dividends
3
in Years 4 through infinity, calculated at the end of Year 3, one period before the first dividend is paid.
tanties
