Question

Suppose the company is facing a fast growth of 22% per year for the next 4 years. After that the growth becomes constant 0%.

Company's beta is 1.2; market risk premium is 5.5% and risk-free rate is 3%.

Last dividend (Do) is $1.25 per share.

Find:

a.

Find required rate of return using CAPM;

b.

Horizon stock price at time 4;

c.

Intrinsic stock value today.

a.

Required return = rS = rRF + b(RPM) =

?

Year

0

1

2

3

4

5

Dividend

b.

Horizon value = D5/(rs - g5) =

Total CFs

PV of the CFs

c.

Price = Sum of PVs

Answer 1

a) r(RF) = 3%

r(RPM)= 5.5%

b= 1.2

As per CAPM = r(S) = r(RF) +b*r(RPM)

= 3 + 1.2*5.5

= 9.6%

b) P4 = D5/(Ke-g) (refer attached snapshot)

= 2.77/(0.096 - 0)

= $ 28.85

c) As per attached snapshot