doomed by this quiz

arvindanallen
Posts: 5
Joined: Sat Jul 28, 2012 10:23 am

doomed by this quiz

Following data for XYZ, Inc is available:

Retention = 30%
ROE = 20%
k = 12%

Using the infinite period, or constant growth, dividend discount model, what would be the value that a CFA analyst would get for the price of XYZs stock assuming that next years earnings will be \$4.25.\$5
a. \$58.30.
b. \$45.45.
c. \$83.3.
Incorrect
Marks for this submission: 0/1.

i selected a) and second of all what is 4.25.5?????

one more question

he question is which one of these is least accurate?
the last option is the least accurate....i dont know how is the first one least accurate?
a. An investor may determine the required rate of return for the dividend discount model (DDM) by adding a risk premium multiplied by beta and adding the product to the nominal risk-free rate.
c. An investor can estimate the growth rate for the dividend discount model (DDM) by multiplying the firm's return on capital employed (ROCE) by the firm's dividend payout ratio.

i selected c as the least accurate cuz growth rate= roe times the retention rate....

Tags:

arvindanallen
Posts: 5
Joined: Sat Jul 28, 2012 10:23 am

Re: doomed by this quiz

please if anyone know that either i am wrong or the quiz is wrong..then plz post

pankaj
Finance Junkie
Posts: 61
Joined: Fri Aug 03, 2012 11:24 am

Re: doomed by this quiz

Yes, the answer for XYZ stock price should be option(A) i.e.58.3
Solution:

Retention Rate 30%
ROE 20%
k(Cost of Equity) 12%
E1(Earnings Next period)5.00
Growth Rate 6.00%
Payout Rate 70%
Div1(Dividend Next Period)3.5
Stock Price 58.33

And the answer for second question should be option(c). Option A & B are correct.

arvindanallen
Posts: 5
Joined: Sat Jul 28, 2012 10:23 am

Re: doomed by this quiz

thanks pankaj but dont u think this is so rediculous....that u give a quiz and if answers are themselves wrong then wats the use if giving such quiz

kaushik.srikanth
Posts: 1
Joined: Mon Aug 06, 2012 2:37 pm

Re: doomed by this quiz

For the second question........

I agree with you that Growth Rate = ROE multiplied by the retention rate.....but for the first option, The calculation of ROR using the Capital Asset Pricing Model (CAPM) is determined by adding a risk premium multiplied by beta and adding the product to the nominal risk-free rate......and not the DDM.....

Option A is the answer .......guess there is a mistake in the third statement .......should ve been ROE instead of ROCE......

arvindanallen
Posts: 5
Joined: Sat Jul 28, 2012 10:23 am

Re: doomed by this quiz

the question says for ddm not to ad ddm......