Question

The risk-free rate is 3.12% and the market risk premium is 9.17%. A stock with a β of 0.84 just paid a dividend of $2.65. The dividend is expected to grow at 20.18% for five years and then grow at 3.83% forever. What is the value of the stock?

Answer format: Currency: Round to: 2 decimal places.

Caspian Sea Drinks needs to raise $70.00 million by issuing additional shares of stock. If the market estimates CSD will pay a dividend of $2.60 next year, which will grow at 3.40% forever and the cost of equity to be 13.37%, then how many shares of stock must CSD sell?

Answer format: Number: Round to: 0 decimal places.

Just wanted to make if I'm doing the process right. thank you

Answer 1

1]	Required rate of return per CAPM = 3.12%+0.84*9.17% =		10.82%
	Value of the stock is the PV of the expected dividends
	when discounted at the required rate of return of 10.82%.
	Year	Dividend	PVIF at 10.82%	PV at 10.82%
	0	$                 2.650
	1	$                 3.185	0.90236	$                    2.87
	2	$                 3.827	0.81426	$                    3.12
	3	$                 4.600	0.73476	$                    3.38
	4	$                 5.528	0.66302	$                    3.67
	5	$                 6.644	0.59829	$                    3.97
	Sum of PV of dividends of years 1 to 5			$                17.01
	Continuing value of dividends at t5 = 6.644*1.0383/(0.1082-0.0383) =	$               98.690
	PV of continuing value = 98.690*0.59829 =			$                 59.05
	Price of the stock today =17.01+59.05 =			$                 76.06
2]	Price of the share today = 2.60/(0.1337-0.034) =	$                 26.08
	Number of share to be sold = 70000000/26.08 =	2684049	Shares