Question

A company is expected to pay a dividend of $1.49 per share one year from now and $1.93 in two years. You estimate the risk-free rate to be 4.2% per year and the expected market risk premium to be 5.6% per year. After year 2, you expect the dividend to grow thereafter at a constant rate of 5% per year. The beta of the stock is 1.4, and the current price to earnings ratio of the stock is 17. What would be an appropriate estimate of the stock price today? (Answer to the nearest penny, i.e. 55.55 but do not use a $ sign).

Answer #1

This is an example of application of dividned growth model.

Let us first calculate the required return on stock of this company

r = Risk free rate + Beta * Market Risk Premium (by CAPM)

r = 4.2% + (1.4 * 5.6%)

**r = 12.04%**

**In order to calculate the stock price today, we need to
discount all future dividend to the present year.**

D_{1} = 1.49

D_{2} = 1.93

D_{3} = 2.0265 (with growth of 5%

**Terminal value of this stock (at t=2) =
D _{3}/(r-g) =** 2.0265/(12.04% - 5%) =

**Current Fiar price of stock= $24.53**

Grominet is
expected to pay an annual dividend of $2.8 one year from now.
Analysts also expect this dividend to grow at 10% per year
thereafter until the fifth year. After then, growth has not been
forecasted by analysts, but it is expected to be lower. Assume that
the risk free rate of return is 3%, that the beta of Grominet is
1.5 and the market risk premium is 5%. What is the expected growth
rate after year 5 implied...

A company has announced that it will pay a dividend of $0.91 per
share next year, and thereafter you expect the dividend to grow at
a constant rate of 4.3% per year indefinitely into the future. If
the required rate of return is 10.4% per year, what would be a fair
price for the stock today? (Answer to the nearest penny.)

A company, GameMore, has just paid a dividend of $4 per share,
D0=$ 4 . It is estimated that the company's dividend
will grow at a rate of 16% percent per year for the next 2 years,
then the dividend will grow at a constant rate of 7% thereafter.
The company's stock has a beta equal to 1.4, the risk-free rate is
4.5 percent, and the market risk premium is 4 percent. What is your
estimate of the stock's current...

You expect Sharp Steel Company to pay a dividend of $2.37 per
share next year. You expect the dividend to grow 10% the following
year, 7% the year after that, and then level off to a growth rate
of 4% indefinitely. Sharp has a beta of 1.4, the risk-free rate of
return is 1.1% and the market risk premium is 5.7%.
a) What is Sharp Steel's stock worth?
b) If Sharp's stock was currently trading for $62.10,
would you buy...

A company has just paid a dividend of $ 2 per share,
D0=$ 2 . It is estimated that the company's dividend
will grow at a rate of 15 % percent per year for the next 2 years,
then the dividend will grow at a constant rate of 5 % thereafter.
The company's stock has a beta equal to 1.4, the risk-free rate is
4.5 percent, and the market risk premium is 4 percent. What is your
estimate of the...

A company, GameMore, has just paid a dividend of $2 per share,
D0=$ 2 . It is estimated that the company's dividend
will grow at a rate of 15% percent per year for the next 2 years,
then the dividend will grow at a constant rate of 6% thereafter.
The company's stock has a beta equal to 1.4, the risk-free rate is
4.5 percent, and the market risk premium is 4 percent. What is your
estimate of the stock's current...

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...

(7-2) Constant Growth Valuation
Boehm Incorporated is expected to pay a $1.50 per share dividend
at the end of this year (i.e., D1=$1.50D1=$1.50). The dividend is
expected to grow at a constant rate of 6% a year. The required rate
of return on the stock, rsrs, is 13%. What is the estimated value
per share of Boehm’s stock?
(7-4) Preferred Stock Valuation
Nick’s Enchiladas Incorporated has preferred stock outstanding
that pays a dividend of $5 at the end of each...

(7-2) Constant Growth Valuation
Boehm Incorporated is expected to pay a $1.50 per share dividend
at the end of this year (i.e., D1=$1.50D1=$1.50). The dividend is
expected to grow at a constant rate of 6% a year. The required rate
of return on the stock, rsrs, is 13%. What is the estimated value
per share of Boehm’s stock?
(7-4) Preferred Stock Valuation
Nick’s Enchiladas Incorporated has preferred stock outstanding
that pays a dividend of $5 at the end of each...

Widget Manufacturers Inc. just paid a $3 per share dividend. It
is expected that dividends will grow at 10.00% per year for the
next 2 years, at 6.00% the third year and 3.00% every year
thereafter. Widget’s’ equity beta is 0.90, while the risk-free rate
is 3.20% per year and the market risk premium is 6.00% per year.
Based on this information, compute the price per share of Widget
stock.
Round your answer to the nearest penny. For example,
$2,371.243...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 3 minutes ago

asked 3 minutes ago

asked 21 minutes ago

asked 26 minutes ago

asked 26 minutes ago

asked 28 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 2 hours ago

asked 2 hours ago