Question

#1 The risk-free rate is 1.48% and the market risk premium is 7.25%. A stock with a β of 0.87 just paid a dividend of $1.18. The dividend is expected to grow at 21.01% for three years and then grow at 3.99% forever. What is the value of the stock?

#2 The risk-free rate is 3.17% and the market risk premium is 5.19%. A stock with a β of 1.10 just paid a dividend of $1.07. The dividend is expected to grow at 24.96% for five years and then grow at 4.89% forever. What is the value of the stock?

#3 Caspian Sea Drinks needs to raise $20.00 million by issuing additional shares of stock. If the market estimates CSD will pay a dividend of $2.30 next year, which will grow at 4.28% forever and the cost of equity to be 13.00%, then how many shares of stock must CSD sell?

#4 Suppose the risk-free rate is 3.32% and an analyst assumes a market risk premium of 6.21%. Firm A just paid a dividend of $1.36 per share. The analyst estimates the β of Firm A to be 1.42 and estimates the dividend growth rate to be 4.12% forever. Firm A has 260.00 million shares outstanding. Firm B just paid a dividend of $1.57 per share. The analyst estimates the β of Firm B to be 0.86 and believes that dividends will grow at 2.66% forever. Firm B has 194.00 million shares outstanding. What is the value of Firm A?

#5 Suppose the risk-free rate is 3.95% and an analyst assumes a market risk premium of 5.24%. Firm A just paid a dividend of $1.34 per share. The analyst estimates the β of Firm A to be 1.24 and estimates the dividend growth rate to be 4.78% forever. Firm A has 297.00 million shares outstanding. Firm B just paid a dividend of $1.96 per share. The analyst estimates the β of Firm B to be 0.84 and believes that dividends will grow at 2.44% forever. Firm B has 198.00 million shares outstanding. What is the value of Firm B?

Answer 1

Answer to Question 1:

Required Return, rs = Risk-free Rate + Beta * Market Risk Premium
Required Return, rs = 1.48% + 0.87 * 7.25%
Required Return, rs = 7.7875%

Last Dividend, D0 = $1.18

Growth rate for next 3 years is 21.01% and a constant growth rate (g) is 3.99%

D1 = $1.1800 * 1.2101 = $1.4279
D2 = $1.4279 * 1.2101 = $1.7279
D3 = $1.7279 * 1.2101 = $2.0909
D4 = $2.0909 * 1.0399 = $2.1743

P3 = D4 / (rs - g)
P3 = $2.1743 / (0.077875 - 0.0399)
P3 = $57.2561

P0 = $1.4279/1.077875 + $1.7279/1.077875^2 + $2.0909/1.077875^3 + $57.2561/1.077875^3
P0 = $50.20

Current Stock Price is $50.20