Current (just paid) dividend per share: $8.96 Beta: 1.4 Risk-free rate: 2% Expec

ID: 2696252 • Letter: C

Question

Current (just paid) dividend per share: $8.96
Beta: 1.4
Risk-free rate: 2%
Expected market return: 16.5%

Given the information above, if this company expects its dividends to remain constant for 6 periods and then stop forever, what should this company's current price be? Answer is 28.17. I need to know how to get this answer and what formula is used. Given the information above, if this company expects its dividends to remain constant for 6 periods and then stop forever, what should this company's current price be? Answer is 28.17. I need to know how to get this answer and what formula is used.

Explanation / Answer

Hi,

Required rate of return = 2 + 1.4*(16.5 -2) = 22.3%

Present Value = 8.96/(1+.223)^1 + 8.96/(1+.223)^2 + 8.96/(1+.223)^3 + 8.96/(1+.223)^4 + 8.96/(1+.223)^5 + 8.96/(1+.223)^6 = 28.17

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Current (just paid) dividend per share: $8.96 Beta: 1.4 Risk-free rate: 2% Expec

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