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 24% per year for the next 2 years, and then at a constant rate of 8% thereafter. The company's stock has a beta of 1.75, the risk-free rate is 5.5%, and the market risk premium is 3%. What is your estimate of the stock's current price? Do not round intermediate calculations. Round your answer to the nearest cent.

Answer 1

Cost of Equity = risk-free rate + market risk premium * beta

= 5.5% + 3% *1.75

= 10.75%

The  stock's current price = Present Value of Dividends + Present Value of Price at Year 2

= $ 3.559844890929 + $ 73.84791218

= $ 77.41

Hence the correct answer is $ 77.41

Notes:

Year	Dividend	Discounting Factor (10.75%)	Present Value ( Dividend * Discounting factor)
0	1.5
1	1.8600000	0.902934537	1.68
2	2.3064000	0.815290779	1.88039
Present Value of Dividends			3.559844890929

Price at Year 2 = Expected Dividend / ( COst of Equity - Growth Rate)

= ($ 2.3064 * 108%) / ( 10.75% - 8%)

= $ 90.57861818

Present Value of Price at Year 2 = Price at Year 2 * 0.815290779

= $ 90.57861818 * 0.815290779

= $ 73.84791218