$17.33 $19.25 $16.51 $18.53 $19.89 a. $17.33 b. $19.25 c. $16.51 d. $18.53 e. $1

Question

$17.33

$19.25

$16.51

$18.53

$19.89

a.

$17.33

b.

$19.25

c.

$16.51

d.

$18.53

e.

$19.89

Financial Calculator Section The following question(s) may require the use of a financial calculator. A financial analyst has been tollowing Fast Start Inc., a new high-growth company. She estimates that the current risk-tree rate is 6.25 percent, the market risk premium is 5 pencent, and that Fast Start's beta is 1.75. The current earnings per share (EPSo) is $2.50. The company has a 40 pencent payout ratio. The analyst estimates that the company's dividend will grow at a rate od 25 percent this year, 20 percent next year, and 15 percent the tollowing year. After three years the dividend is expected to grow at a constant rate of 7 pencent a year. The company is expected to maintain its current payout ratio. The analyst believes that the stock is lairly priced. What is the current price ol the stock? a. $17.33 b, $19.25 o c, $16.51 o d. $18.53 o e. $19.89

Explanation / Answer

Calculation of expected return = Risk free return + Beta * Market risk premium

= 6.25+1.75*5

= 15%

D0 = 2.50*0.40 i.e 1

D1 = 1*125% i.e 1.25

D2 = 1.25*120% i.e 1.50

D3 = 1.50*115% i.e 1.725

D4 = 1.725*107% i.e 1.8458

Price of the stock = D1/ (1+Ke)^1 + D2/(1+Ke)^2+D3/(1+Ke)^3+D4/Ke-G*1/(1+Ke)^3

= 1.25/1.15+1.50/1.15^2+1.725/1.15^3+1.8458/0.15-0.07*1/1.15^3

= 18.53

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