Question

1. The following information is given for a stock. Using a dividend discount model, what is the price for this stock?

Beta Equity: 2

Market Premium:3%

Risk free rate =1 %

Current EPS=$3

EPS growth rate for the first 5 years: 3%

EPS growth after 5 years: 1%

Payout for the first 5 years: 50%

Payout after 5 years: 40%

Answer 1

Required Return of Stock under CAPM -

Stock Price under Dividend discount model -

where,

where,

r = required rate of return

g = perpetual growth rate

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

Cell reference -

Hope this will help, please do comment if you need any further explanation. Your feedback would be appreciated.