XYZ corporation paid a dividend of $1.15 on its common stock yesterday. The dividends of XYZ are expected to grow at 5% per year indefinitely. If the risk-free rate is 3%; market risk premium is 10%, and the beat of XYZ is 1.12, estimate the value of XYZ stock 3 years from now.
Required Return = Risk-free Rate + Beta * Market Risk
Premium
Required Return = 3.00% + 1.12 * 10.00%
Required Return = 14.20%
Last Dividend = $1.15
Growth Rate = 5%
Expected Dividend in 1 year = Last Dividend * (1 + Growth
Rate)
Expected Dividend in 1 year = $1.15 * 1.05
Expected Dividend in 1 year = $1.2075
Current Price = Expected Dividend in 1 year / (Required Return -
Growth Rate)
Current Price = $1.2075 / (0.142 - 0.050)
Current Price = $13.125
Expected Price in 3 years = Current Price * (1 + Growth
Rate)^3
Expected Price in 3 years = $13.125 * 1.05^3
Expected Price in 3 years = $15.19
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