Name: CFA Level 2 - Equity Session 11 - Reading 42 Discounted Dividend Valuation - LOS e
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CFA Institute
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CFA Level 2 - Equity
Academic year:

2023
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2
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anon

CFA Level 2 - Equity Session 11-Reading 42 Discounted Dividend Valuation - LOS e (Practice Questions, Sample Questions) 1. Ambiance Company has a current market price of $42, a current dividend of $1.25 and a required rate of return of 12%. All earnings are paid out as dividends. What is the present value of Ambiance’s growth opportunities (PVGO)? A) $38.85. B) $31.58. C) $16.71. Explanation: The PVGO is $31.58: PVGO = $42 – ($1.25 / 0.12) = $31.58 2. Obsidian Glass Company has current earnings of $2.22, a required return of 8%, and the present value of growth opportunities (PVGO) of $8.72. What is the current value of Obsidian’s shares? A) $57.17. B) $36.47. C) $10.94. Explanation: The current value is $36.47. V0 = ($2.22 / 0.08) + $8.72 = $36.47 3. Tri-coat Paints has a current market value of $41 per share with a earnings of $3.64. What is the present value of its growth opportunities (PVGO) if the required return is 9%? A) $0.56. B) $3.92. C) $1.27. Explanation: The PVGO is $0.56: PVGO = $41 – ($3.64 / 0.09) = $0.56 4. The required rate of return for an asset is often difficult to determine, but if we know the growth prospects and the current earnings of a firm we can determine the implied required rate of return from the: A) dividend rate. B) market price. C) earnings retention rate. Explanation: The required rate of return is implicit in the asset’s market price and can be determined with the present value of growth opportunities 5. Xerxes, Inc. forecasts earnings to be permanently fixed at $4.00 per share. Current market price is $35 and required return is 10%. Assuming the shares are properly priced, the present value of growth opportunities is closest to: A) +$3.50. B) +$5.00. C) -$5.00. Explanation: Share price = (no-growth earnings / required return) + PVGO 35 = (4 / 0.10) + PVGO PVGO = -$5.00

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