Question

Juvani has a beta of 1.50, the risk-free rate of interest is currently 12 percent, and the required return on the market portfolio is 18 percent. The company plans to pay a dividend of $2.45 per share in the coming year and anticipates that its future dividends will increase at an annual rate as follow; D2017= 2,32, D2016= 2.12, D2015=2.30. what is the price of Juvani stock

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Solve quickly I get you two UPVOTE directly
Thank's
Abdul-Rahim Taysir

Answer 1

First we should calculate the cost of equity from Capital Asset Pricing model

Cost of equity= (Risk-free rate)+(beta*(Required return on the market-risk-free rate))

= 0.12+(1.5*(0.18-0.12))=0.21=21%

Dividend at the end of 2014 is $2.45. Discounted Value of dividend to be received in 2014 year end is 2.0248

Dividend for 2015= (2.45*1.023)= $2.51 (ronding off to 2 decimal points). Discounted Value of dividend to be received in 2015 year end is $1.7144

Dividend for 2016=(2.51*1.0212)=$2.56. Discounted Value of dividend to be received in 2016 year end is $1.4450

Dividend for 2017= (2.56*1.0232)=$2.62

Terminal value calculation for Dividend after end of 2017 will be calculated as follows with an assumption of post 2017 the dividends would grow at 2.32%

Terminal value of Dividends is ((2.62*1.0232)/(0.21-0.0232)=(2.62*1.0232)/0.1868=$14.35

This terminal value is the present value of all the future dividends post 2017.So dividends at the end of 2017 is

$14.35+$2.62=$16.97

Discounted Value of terminal value to be received in 2017 year end is $7.9166

So Present Value of the stock is sum of discounted value of the above items which is

= $13.1008