Nonconstant Growth Valuation A company currently pays a dividend of $3 per share
ID: 2613362 • Letter: N
Question
Nonconstant Growth Valuation
A company currently pays a dividend of $3 per share (D0 = $3). It is estimated that the company's dividend will grow at a rate of 16% per year for the next 2 years, then at a constant rate of 7% thereafter. The company's stock has a beta of 1.05, the risk-free rate is 6.5%, and the market risk premium is 4%. What is your estimate of the stock's current price? Round your answer to the nearest cent.
$
Note: You must keep all decimal places to correctly solve this problem.
Explanation / Answer
Dividend at the end of year 3:
= $3×(1+16%)×(1+16%)×(1+7%)
= $4.32
Price at end year 3 beginning;
= $4.32÷[(6.5%+1.05×4%)-7%]
= $116.76
Current stock price:
= $116.76×PVF(10.7%,2)
= $95.28
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