Note: You must keep all decimal places to correctly solve this problem. Nonconst

Question

Note: You must keep all decimal places to correctly solve this problem.

Nonconstant Growth Valuation

A company currently pays a dividend of $1 per share (D0 = $1). It is estimated that the company's dividend will grow at a rate of 21% per year for the next 2 years, then at a constant rate of 7% thereafter. The company's stock has a beta of 1.25, the risk-free rate is 6.5%, and the market risk premium is 5%. What is your estimate of the stock's current price? Round your answer to the nearest cent.

$  

Nonconstant Growth Valuation

A company currently pays a dividend of $1 per share (D0 = $1). It is estimated that the company's dividend will grow at a rate of 21% per year for the next 2 years, then at a constant rate of 7% thereafter. The company's stock has a beta of 1.25, the risk-free rate is 6.5%, and the market risk premium is 5%. What is your estimate of the stock's current price? Round your answer to the nearest cent.

$  

Explanation / Answer

Dividend at the end of year 3:

= $1×(1+21%)×(1+21%)×(1+7%)

= $1.57

Price at end year 3 beginning;

= $1.57÷[(6.25%+1.25×5%)-7%]

= $28.55

Current stock price:

= $28.55×PVF(12.5%,2)

= $22.56

Related Questions

Navigate

• Browse (All)
• Browse N
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.