Question

Church Inc. is presently enjoying relatively high growth because of a surge in the demand for its new product. Management expects earnings and dividends to grow at a rate of 22% for the next 4 years, after which competition will probably reduce the growth rate in earnings and dividends to zero, i.e., g = 0. The company's last dividend, D₀, was $1.25, its beta is 1.20, the market risk premium is 5.50%, and the risk-free rate is 3.00%. What is the current price of the common stock? Do not round intermediate calculations.

a. $26.57

b. $23.39

c. $32.69

d. $27.37

e. $28.97

Answer 1

Required Rate of Return = Rf + Beta * Market Risk Premium

= 3% + 1.20* (5.50%)

= 9.6%

D0 = 1.25

D1 = 1.25( 1+ 0.22) = 1.525

D2 = 1.525( 1+ 0.22) = 1.8605

D3 = 1.8605( 1+ 0.22) = 2.26981

D4 = 2.26981( 1+ 0.22) = 2.7691682

Value of Stock =

=

= $26.57

Option A is correct.

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