Question

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Type 1A: Brite Events has been growing at a rate of 20% per year, and you...

Type 1A: Brite Events has been growing at a rate of 20% per year, and you expect this growth rate in earnings and dividends to continue for another 4 years. The last dividend paid was $2, and if the steady (i.e., constant) growth rate after 4 years is 5%, what should the stock price be today? Assume that the stock has a beta of 2.0, Treasury bills yield 3%, and the market risk premium is 6%.

Expert Solution

- Last Dividend Paid(D0) = $2

Growth Rate for next 4 years (g) = 20%

Growth rate thereafter(g1) = 5%

As per CAPM,

R_f = Risk free Return or Treasury bills yield = 3%

R_mp = Market Risk Premium = 6%

Beta of STock = 2

Required Rate of Return(ke) = 3% + 2(6%)

=15%

Calcualting the Stock Price:-

P0 = 2.0870 + 2.1777 + 2.2724 + 2.3712 + 24.8973

P0 = $33.81

So, Stock price today is $33.81

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jeff jeffy answered 2 years ago

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