1) A company currently pays a dividend of $3.25 per share, D0 = 3.25. It is esti

Question

1) A company currently pays a dividend of $3.25 per share, D0 = 3.25. It is estimated that the company's dividend will grow at a rate of 23% percent per year for the next 2 years, then the dividend will grow at a constant rate of 8% thereafter. The company's stock has a beta equal to 1.25, the risk-free rate is 8 percent, and the market risk premium is 3 percent. What is your estimate is the stock's current price? Round your answer to the nearest cent.

2)  The risk-free rate of return, rRF , is 11%; the required rate of return on the market, rM, 15%; and Schuler Company's stock has a beta coefficient of 1.8.

Explanation / Answer

return= 8+3*1.25=11.75%
Total dividend= 3.73*(1+.08)/(0.1175-.08)=107.424

2.

Return = Rf+(Rm-Rf)*beta
1.return= 11%+ (15-11)*1.8=18.2%

Price= D1/(r-g)

Should sell at= 2/(18.2-3)= Rs. 13.16

2. return= 5+(13-5)*1.8=19.4%

Price= D1/(r-g)
Stock price= 2/(19.4-3)= $ 12.19 or 12.20
Price decreases by increase in money supply.

3.return=5+(8-5)*1.8=10.4%
Stock price= 2/(10.4-3)= $ 27.03
Price increases

4.return=5+(8-5)*0.6=6.8%
Stck price= 2/(0.068-0.06)= $ 250

3.
1. Price= D0*(1+g)/(r-g)
=1*(1+.02)/(0.15-0.02)= $ 7.846

2. Price=1*(1+.00)/(0.15-0)=$6.67

3. Price= 1*(1+.02)/(0.15-0.02)= $ 7.846

4.price=1*(1+.14)/(0.15-0.14)=$ 114

Year dividend Discount rate PV of dividend 1 3.25+23%=3.48 0.895 3.1146 2 3.48+23%=3.73 0.801 2.99 3 See note above 107.424 0.716 76.92 Total current vallue=
83.0246

Related Questions

Navigate

• Browse (All)
• Browse 1
• Subjects

---

---

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