Special Webinar Question: Bond and Stock Valuation Concepts

Posted by Adam Scherer, CFP®, MS

May 14, 2020

This question is a part of BIF's Special Webinar series which was created to help students affected by the July 2020 CFP® Exam postponement to September 2020.


Penelope purchased 500 shares of BIF for $10,000. BIF stock is currently paying $400 of annual dividend income to Penelope. Dividends are expected to grow 4% annually. BIF stock is currently priced at $56.

Identify Penelope’s required rate of return.


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Instructor insight:

Use the required rate of return formula for dividend-paying securities to solve:

RRR-1

r = required rate of return
D1 = Dividend (D0 x (1 + g))
P = Price of the stock
g = fixed, stable growth rate

Dividends are expected to grow 4% annually. The dividend/share is ($400/500 shares). BIF stock is currently priced at $56.

RRR1

r = 0.0549, or 5.49%


CFP® Exam insight:

Remember to advance the dividend that is currently paid by multiplying by (1 + g) with g expressed as a decimal.

D1 = Dividend (D0 x (1 + g))

 

Topics: Practice Questions