# CFA Level 2 - Equity Session 11 - Reading 42 Discounted Dividend Valuation - LOS g

Categories: Economics

## CFA Level 2 - Equity, Session 11-Reading 42

### Discounted Dividend Valuation - LOS g

#### (Practice Questions, Sample Questions)

1. What is the value of a fixed-rate perpetual preferred share (par value \$100) with a dividend rate of 7.0% and a required return of 9.0%?

A) \$71.
B) \$56.
C) \$78. [The value of the preferred is \$78: V_0 = (\$100par × 7%) / 9% = \$77.78]

2. A \$100 par, perpetual preferred share pays a fixed dividend of 5.0%. If the required rate of return is 6.5%, what is the current value of the shares?

A) \$100.00.
B) \$88.64.
C) \$76.92. [The current value of the shares is .

92: V0 = (\$100 × 0.05) / 0.065 = \$76.92]

3. If the value of an 8%, fixed-rate, perpetual preferred share is \$134, and the par value is \$100, what is the required rate of return?

A) 8%.
B) 7%.
C) 6%. [The required rate of return is 6%: V0 = (\$100par × 8%) / r = \$134, r = 5.97%]

4. What is the value of a fixed-rate perpetual preferred share (par value \$100) with a dividend rate of 11.0% and a required return of 7.5%?

A) \$147. [The value of the preferred is \$147: V0 = (\$100par × 11%) / 7.5% = \$146.67]
B) \$152.
C) \$138.

Updated: Aug 04, 2023

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