Question

Peratti Industries recently paid a $2.50 dividend per share. The dividend of the company is expected to grow by 30 percent next year, 25 percent the following year, and 20 percent the year after before growing at constant rate of 6 percent growth that continue forever. Peratti Industries’ beta is 0.7619, the risk-free rate of interest is 1.6 percent, and the rate of return on market is 10 percent. what is the current stock price of Peratti Industries? What was the the approach you have used to solve this problem?

Answer 1

required return= risk-free rate +Beta*(MArket rate- risk-free rate )

=1.6+0.7619*(10-1.6)

=7.99996%

d1=(2.5*1.3)=$3.25

d2=(3.25*1.25)=$4.0625

d3=(4.0625*1.2)=$4.875

Value after year 3=(D3*Growth rate)/(Required return-Growth rate)

=(4.875*1.06)/(0.0799996-0.06)

=$258.3801676

Hence current stock price=Future dividends*Present value of discounting factor(7.9996%,time period)

=3.25/1.0799996+4.0625/1.0799996^2+4.875/1.0799996^3+258.3801676/1.079996^3

which is equal to

=$215.47(Approx).