Question

The company's stock has a beta equal to 1.22 , the risk-free rate is 4.5 percent, and the market risk premium is 7.0 percent. What is your estimate of the stock's required rate of return? Answer in a percentage without the % sign, and round it to two decimal places, i.e., 10.54 for 10.54% (or 0.1054).

A company has just paid a dividend of $ 3 per share, D₀=$ 3 . It is estimated that the company's dividend will grow at a rate of 17 % 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 price? Round your answer to two decimal places.

Answer 1

Answer 1.

Required Rate of Return = Risk-free Rate + Beta * Market Risk Premium
Required Rate of Return = 4.50% + 1.22 * 7.00%
Required Rate of Return = 13.04%

Answer 2.

Required Rate of Return, r = Risk-free Rate + Beta * Market Risk Premium
Required Rate of Return, r = 4.50% + 1.40 * 4.00%
Required Rate of Return, r = 10.10%

Last Dividend, D0 = $3.00

Growth Rate for next 2 years is 17%, followed by a constant growth rate (g) of 6%

D1 = $3.00 * 1.17 = $3.51
D2 = $3.51 * 1.17 = $4.11
D3 = $4.11 * 1.06 = $4.36

P2 = D3 / (r - g)
P2 = $4.36 / (0.101 - 0.06)
P2 = $106.34

P0 = $3.51/1.101 + $4.11/1.101^2 + $106.34/1.101^2
P0 = $94.30

Current price is $94.30

answered by: anonymous