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Question 1

Multiple Choice

Confidence Level

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Danworth Energy recently paid an annual dividend of €3.20 per share. Analysts expect this dividend to grow at a constant rate of 4% per year into perpetuity. If investors require a 9% return, the estimated value of a share of Danworth Energy is closest to:

€59.20

€66.56

€68.00

Explanation

This is a classic Dividend Discount Model (DDM) question using the Gordon Growth Model (Constant Growth):
p _{0}  =   \frac{D_{1}}{r - g}
Where:
D1 = Next year’s dividend = D0 × (1+g) = 3.20 × 1.04 = €3.328
r = 9% = 0.09
g = 4% = 0.04
P  _{0}     =  \frac{3.328}{0.09 - 0.04} =  \frac{3.328}{0.05} =  66.56

Time Value of Money: Dividend Discount and Equity Valuation

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Question 1

Danworth Energy recently paid an annual dividend of €3.20 per share. Analysts expect this dividend to grow at a constant rate of 4% per year into perpetuity. If investors require a 9% return, the estimated value of a share of Danworth Energy is closest to:

Explanation

p _{0} = \frac{D_{1}}{r - g}

P _{0} = \frac{3.328}{0.09 - 0.04} = \frac{3.328}{0.05} = 66.56

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Time Value of Money: Dividend Discount and Equity Valuation

Test Options

Reset All Confidence Levels

Creating Copy

Question 1

Danworth Energy recently paid an annual dividend of €3.20 per share. Analysts expect this dividend to grow at a constant rate of 4% per year into perpetuity. If investors require a 9% return, the estimated value of a share of Danworth Energy is closest to:

Explanation

p _{0} = \frac{D_{1}}{r - g}

P _{0} = \frac{3.328}{0.09 - 0.04} = \frac{3.328}{0.05} = 66.56

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