Question

The risk-free rate of 3.32% and the market risk premium is 6.18%. A stock with a Beta of 1.79 just paid a dividend of $2.80. The dividend is expected to grow at 24.13% for three years and then grow at 3.42% forever. What is the value of the stock?

Answer #1

Required rate=risk free rate+beta*market risk premium

=3.32+(6.18*1.79)=14.3822%

D1=(2.8*1.2413)=3.47564

D2=(3.47564*1.2413)=4.314311932

D3=(4.314311932*1.2413)=5.355355401

Value after year 3=(D3*Growth Rate)/(Required rate-Growth rate)

=(5.355355401*1.0342)/(0.143822-0.0342)

$50.52369557

Hence current value=Future dividends and value*Present value of discounting factor(rate%,time period)

=3.47564/1.143822+4.314311932/1.143822^2+5.355355401/1.143822^3+$50.52369557/1.143822^3

=**$43.68(Approx).**

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