Question

The risk-free rate is 2.29% and the market risk premium is 6.94%. A stock with a β of 1.50 just paid a dividend of $2.65. The dividend is expected to grow at 23.33% for three years and then grow at 4.25% forever. What is the value of the stock?

Answer #1

Value of the stock =

Re = Rf + (Rm-Rf )*beta

Re = 2.29 + (6.94)*1.5

**Re = 12.7%**

Enter the stroke in the financial calculator in Cashflow
mode-

C1 = 2.65

C2 = 3.268 ( dividend grow at 23.33% i.e 2.65 + (2.65
*23.33%))

C3= 4.030 (dividend grow at 23.33%)

C4 = 4.97 + 61.30 = 66.27

I = 12.7

**NPV = 48.82**

(4.97 + (4.97*4.25%) = 5.18) , after 3 years dividend grow at 4.25%
forever

terminal value = 5.18 / (0.127 - 0.0425)

Terminal value = 61.30

(dividend grow at 23.33% and then grow 4.25% forever)

**Value of the stock = 48.82**

**I hope this clear your
doubt.**

**Feel free to comment if you still have any query
or need something else. I'll help asap.**

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helpful.**

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