Question

What is the value of a share of stock that paid a dividend of $( $ 2.76 ) last year, and expected to grow at 15% for the next (3) years, then constant constant growth of 5% in perpetuity. For the required return, assume a risk free rate of 3%, a long-term market rate of return of 10% and a Beta of 1.04.

Answer 1

Required return = Risk-free rate + Beta(Market return - Risk-free rate)

Required return = 0.03 + 1.04(0.10 - 0.03)

Required return = 0.1028 or 10.28%

P0 = [D0(1 + g1) / (R − g1)]{1 − [(1 + g1) / (1 + R)]^t} + [(1 + g1) / (1 + R)]^t[D0(1 + g2) / (R − g2)]

P0 = [$2.76(1.15) / (0.1028 − 0.15)][1 − (1.15 / 1.1028)^3] + [(1.15) / (1.1028)]^3[$2.76(1.05) / (0.1028 − 0.05)]

P0 = $71.25