A stock currently trading at $38.60 paid a dividend of $2 per share for the year...

A stock currently trading at $38.60 paid a dividend of $2 per share for the year 2019. Analysts expect dividend growth rate of 20% for the next three years and then growth is expected to revert to 7% thereafter for an indefinite amount of time. The stock and the market (i.e. S&P 500) index have the same beta. A 10-year Treasury bond has a rate of 5%. The market return is 12% and the cost of capital (WACC) is 9.5%.

Using CAPM, estimate the required rate of return.
What discount rate will you use to value this stock, weighted average cost of capital or required rate of return? Why?
Estimate the stock’s intrinsic value.
As an analyst, would you recommend this stock to a client who is looking for stocks to buy? Why?

Expert Solution

jeff jeffy answered 2 years ago

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