Question

Assume that the current dividend (D0) is $2, risk free rate is 6%, market return is...


Assume that the current dividend (D0) is $2, risk free rate is 6%, market return is 12%, and firm’s beta is 1.333. The firm’s dividends are expected to follow the following growth pattern. Estimate the firms current stock price (P0). You must show your calculations.

Year. Dividend growth rate
1-2. 25%
3-4. 20%
5-6. 15%
7 on. 9%
Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Given D0 = $2

Hence, D1 = 2*1.25 = 2.5
D2 = 2*1.252 = 3.125
D3 = 2*1.252*1.20 = 3.75
D4 = 2*1.252*1.202 = 4.5
D5 = 2*1.252*1.202*1.15 = 5.175
D6 = 2*1.252*1.202*1.152 = 5.951
D7 = 2*1.252*1.202*1.152*1.09 = 6.487

Using Gordon Growth model,

Pn = Dn+1/(r-g)

=> P6 = 6.487/(0.12-0.09) = 216.233

Hence, P0 = D0 + D1/(1+r) + D2/(1+r)2 + D3/(1+r)3 + D4/(1+r)4 + D5/(1+r)5 + D6/(1+r)6 + P6/(1+r)6

= 2 + 2.5/(1.12) + 3.125/(1.12)2 + 3.75/(1.12)3 + 4.5/(1.12)4 + 5.175/(1.12)5 + 5.951/(1.12)6 + 216.233/(1.12)6

= 127.754

Hence, Current Stock Price = P0 = $127.754

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
The risk-free rate of return is 2 percent, and the expected return on the market is...
The risk-free rate of return is 2 percent, and the expected return on the market is 7.8 percent. Stock A has a beta coefficient of 1.7, an earnings and dividend growth rate of 7 percent, and a current dividend of $3.00 a share. Do not round intermediate calculations. Round your answers to the nearest cent. If the beta coefficient falls to 1.4 and the other variables remain constant, what will be the value of the stock? $___________ Explain why the...
The risk-free rate of return is 4 percent, and the expected return on the market is...
The risk-free rate of return is 4 percent, and the expected return on the market is 7.1 percent. Stock A has a beta coefficient of 1.4, an earnings and dividend growth rate of 6 percent, and a current dividend of $1.50 a share. Do not round intermediate calculations. Round your answers to the nearest cent. What should be the market price of the stock? $ If the current market price of the stock is $45.00, what should you do? The...
Given the information below, please estimate the constant required rate of return. P0 = $30 D0=$2...
Given the information below, please estimate the constant required rate of return. P0 = $30 D0=$2 g1=2% g2=4% g3=6% g4=8% g5=10% g6=12% Growth rate after year 6 is expected to be 3.5% and stay constant forever. Given the risk-free rate is 3% and the equity risk premium is 4%, the stock is overvalued if the actual beta for the security is 1.8. Do you agree? Why?
A.) Assume that the risk-free rate of interest is 6% and the expected rate of return...
A.) Assume that the risk-free rate of interest is 6% and the expected rate of return on the market is 16%. A stock has an expected rate of return of 4%. What is its beta? B.) Assume that both portfolios A and B are well diversified, that ?(?a ) = 12%, and ?(?b ) = 9%. If the economy has only one factor, and ? a = 1.2, whereas ? b = 0.8, what must be the risk-free rate?
() The risk-free rate and the expected market rate of return are 0.056 and 0.125, respectively....
() The risk-free rate and the expected market rate of return are 0.056 and 0.125, respectively. According to the capital asset pricing model (CAPM), what is the expected rate of return on a security with a beta of 1.25?     (s) Consider the CAPM. The risk-free rate is 5%, and the expected return on the market is 15%. What is the beta on a stock with an expected return of 17%? (A coupon bond pays annual interest, has a par value...
eBook Problem 11-06 The risk-free rate of return is 1 percent, and the expected return on...
eBook Problem 11-06 The risk-free rate of return is 1 percent, and the expected return on the market is 9 percent. Stock A has a beta coefficient of 1.5, an earnings and dividend growth rate of 3 percent, and a current dividend of $2.80 a share. Do not round intermediate calculations. Round your answers to the nearest cent. $   The stock -Select-shouldshould notItem 2 be purchased. $   $   $   The increase in the return on the market -Select-increasesdecreasesItem 6 the...
(i) The risk-free rate of return is 6% and the return on the market portfolio is...
(i) The risk-free rate of return is 6% and the return on the market portfolio is 9.5%. What is the expected return from shares in companies in Zambia and South Africa if: (1) The beta factor for company Zambia shares is 3.25. [2 Marks] (2) The beta factor for company South Africa shares is 0.90. [2 Marks] (ii) The return on shares of company Zambia is 12%, but its normal beta factor is 1.12. The risk-free rate of return is...
The risk free rate is 6%, the expected rate of return on the market portfolio is...
The risk free rate is 6%, the expected rate of return on the market portfolio is 8%. Cure-Covid Corp (CCC) is selling for $80 in the market right now. You estimate that CCC's dividends will grow at 2.5% a year indefinitely. CCC's earnings in one year are expected to be $20 and CCC pays out 60% of its earnings as dividends. What is the beta of CCC? Expected Dividends = 20 * 60%
Nonconstant Dividend Growth Valuation A company currently pays a dividend of $4 per share (D0 =...
Nonconstant Dividend Growth Valuation A company currently pays a dividend of $4 per share (D0 = $4). It is estimated that the company's dividend will grow at a rate of 20% per year for the next 2 years, and then at a constant rate of 6% thereafter. The company's stock has a beta of 1.4, the risk-free rate is 6.5%, and the market risk premium is 2%. What is your estimate of the stock's current price? Do not round intermediate...
A company currently pays a dividend of $2 per share (D0 = $2). It is estimated...
A company currently pays a dividend of $2 per share (D0 = $2). It is estimated that the company's dividend will grow at a rate of 20% per year for the next 2 years, then at a constant rate of 7% thereafter. The company's stock has a beta of 1.85, the risk-free rate is 6%, and the market risk premium is 4%. What is your estimate of the stock's current price? Do not round intermediate calculations. Round your answer to...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT