Integrative Risk and valuation
Giant Enterprises' stock has a required return of 16.7 %. The company, which plans to pay a dividend of $1.69 per share in the coming year, anticipates that its future dividends will increase at an annual rate consistent with that experienced over 2013 -2019 period, when the following dividends were paid
2019 $1.61
2018 $1.53
2017 $1.46
2016 $1.39
2015 $1.32
2014 $1.26
2013 $1.20
a. If therisk-freerate is 6%,what is the risk premium onGiant'sstock?
b. Using the constant-growth model, estimate the value ofGiant's stock.
(Hint:Round the computed dividend growth rate to the nearest wholepercent.)
c. Explain what effect,if any,a decrease in the risk premium would have on the value of Giant's stock.
a
Risk premium = required rate-risk free rate = 16.7-6 = 10.7%
b
Annual average growth rate |
=((last value/First value)^(1/Time between 1st and last value)-1)*100 |
=((1.61/1.2)^(1/6)-1)*100 |
Annual Growth rate% = 5.0 |
As per DDM |
Price = Dividend in 1 year/(cost of equity - growth rate) |
Price = 1.69/ (0.167 - 0.05) |
Price = 14.44 |
c
If risk premium decreases , price will increase as price is inversely proportional to required rate and required rate is directly proportional to risk premium
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