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

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