Question

A company currently pays a dividend of $1.5 per share (D0 = $1.5). It is estimated that the company's dividend will grow at a rate of 23% per year for the next 2 years, and then at a constant rate of 7% thereafter. The company's stock has a beta of 1.65, the risk-free rate is 6.5%, and the market risk premium is 5%. What is your estimate of the stock's current price? Do not round intermediate calculations. Round your answer to the nearest cent.

Answer 1

Present value = Future value/(1+i)^n

i = interest rate per period

n= number of periods

value of stock = Present value of dividends + Horizontal value

Horizontal value = dividend next year/(Required return - growth rate)

required return = risk free rate + beta * market risk premium

= 6.5% + 1.65 * 5%

= 14.75%

Horizontal value = D3/r-g

= 1.5*1.23^2 *1.07/0.1475-0.07

= 31.3316709677

Current stock price = 1.5*1.23/1.1475 + 1.5*1.23^2/1.1475^2 + 31.3316709677/1.1475^2

= 27.13