Dr. S. Dargil recently took his company – Filing Documents Corporation (FDC) - p

ID: 2650729 • Letter: D

Question

Dr. S. Dargil recently took his company – Filing Documents Corporation (FDC) - public through an initial public offering. He is expanding the business quickly to take advantage of an otherwise unexploited market. Growth for his company is expected to be 40 percent for the first three years and then he expects it to slow down to a constant 15 percent. The most recent dividend was $0.75. Based on the most recent returns, the beta for his company is approximately 1.75. The risk-free rate is 4.5 percent and the market risk premium is 8 percent. What is the current price of FDC's stock?
I need to see the work to. So I can understand the question and how the answer was found Please

Explanation / Answer

Answer:

Given that :

Beta = 1.75

Risk Free rate =4.5%

Market risk premium =8%

Using the formula:

Expected Return = Risk free rate + Beta * Market risk premium

Expected Return = 4.5% + 1.75 * 8%

=18.5%

Hence 18.5% shall be Discounting rate for calculation of Current Price

Calculation of Current Share Price

Year 0

Year 1

Year 2

Year 3

Year 4

Dividend

1.0500

1.4700

2.0580

2.3667

(0.75*140%)

(1.05*140%)

(1.47*140%)

(2.0580*115%)

Price at the end of year 3

67.6200

Dividend Year 4 / (Required rate - Growth rate)

(2.3667 /(18.5%-15%)

Net cash flows

$ 1.0500

$ 1.4700

$ 69.6780

PVF(18.5%)

0.84388

0.71214

0.60096

1/(1+0.185)^1

1/(1+0.185)^2

1/(1+0.185)^3

Presebt value = Cash flows* PVF

$ 0.8861

$ 1.0468

$ 41.8736

Current Share Price = Sum of PVs

$ 43.81