Question

A financial analyst has been following Davis Inc., a new high-tech firm. He estimates that the...

A financial analyst has been following Davis Inc., a new high-tech firm. He estimates that the current risk-free rate (rF) is 6.25%, the market risk premium (rM - rF) is 5%, and the firm’s beta is 1.75. The current dividend just paid (D0) is $1.00. The analyst estimates that the company’s dividend will grow at a rate of 25% this year, 20% next year, and 15% the following year. After three years the dividend is expected to grow at a constant rate of 7% a year. The analyst believes that the stock is fairly priced. What’s the horizon value (terminal value) of the stock at the end of year 3 for the constant growth period?

$23.07

$23.83

$25.42

$26.85

Using the information from the question above, calculate the current price of the stock.

$15.62

$17.21

$18.53

$19.83

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