Question

The risk-free rate is 1.40% and the market risk premium is 7.00%. A stock with a β of 1.33 just paid a dividend of $1.71. The dividend is expected to grow at 24.16% for three years and then grow at 4.66% forever. What is the value of the stock?

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

The risk-free rate is 2.84% and the market risk premium is 5.79%. A stock with a β of 1.17 just paid a dividend of $1.22. The dividend is expected to grow at 21.98% for five years and then grow at 3.28% 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.

Could really use the help! Thanks!

Answer 1

Solution to the First Question

Step-1, The Calculation of the required rate of return on the stock

As per Capital Asset Pricing Model [CAPM], the required rate of return for the stock is calculated by using the following equation

The required rate of return = Risk-free Rate + [Beta x Market risk premium]

= 1.40% + [1.33 x 7.00%]

= 1.40% + 9.31%

= 10.71%

Step-2, Calculation of Dividend per share for the next 3 years

Dividend in Year 0 (D0) = 1.71 per share

Dividend in Year 1 (D1) = $2.1231 per share [$1.71 x 124.16%]

Dividend in Year 2 (D2) = $2.6361 per share [$2.1231 x 124.16%]

Dividend in Year 3 (D3) = $3.2730 per share [$2.6361 x 124.16%]

Step-3, Calculation of Stock Price for the Year 3 (P3)

Here, we have Dividend per share in year 3 (D3) = $3.2730 per share

Dividend Growth Rate (g) = 4.66% per year

Required Rate of Return (Ke) = 10.71%

Stock Price for the Year 3 = D3(1 + g) / (Ke – g)

= $3.2730(1 + 0.0466) / (0.1071 – 0.0466)

= $3.4255 / 0.0605

= $56.62 per share

Step-4, Value of the Stock

As per Dividend Discount Model, the Value of the Stock is the aggregate of the Present Value of the future dividend payments and the present value the stock price for the year 3

Year	Cash flow ($)	Present Value factor at 10.71%	Present Value of cash flows ($)
1	2.1231	0.90326	1.92
2	2.6361	0.81588	2.15
3	3.2730	0.73695	2.41
3	56.62	0.73695	41.73
\TOTAL			48.21

“Hence, the Value of the stock will be $48.21”

NOTE

The Formula for calculating the Present Value Factor is [1/(1 + r)ⁿ], Where “r” is the Discount/Interest Rate and “n” is the number of years.