Question
In: Finance
Suppose the dividends for the Seger Corporation over the past six years were $1.02, $1.10, $1.19,...
Suppose the dividends for the Seger Corporation over the past six years were $1.02, $1.10, $1.19, $1.27, $1.37, and $1.42, respectively. Assume that the historical average growth rate will remain the same for 2020. Compute the expected share price at the end of 2020 using the perpetual growth method. Assume the market risk premium is 9.3 percent, Treasury bills yield 5.3 percent, and the projected beta of the firm is .96.
(Hint: Average of all the growth in between each year. That gives you the growth.)
Solutions
Expert Solution
| As per CAPM |
| expected return = risk-free rate + beta * (Market risk premium) |
| Expected return% = 5.3 + 0.96 * (9.3) |
| Expected return% = 14.23 |
| Annual average growth rate=((last value/First value)^(1/Time between 1st and last value)-1)*100 |
| Annual Growth rate=((1.1/1.02)^(1/1)-1)*100 |
| Annual Growth rate% = 7.84 |
| Annual average growth rate=((last value/First value)^(1/Time between 1st and last value)-1)*100 |
| Annual Growth rate=((1.19/1.1)^(1/1)-1)*100 |
| Annual Growth rate% = 8.18 |
| Annual average growth rate=((last value/First value)^(1/Time between 1st and last value)-1)*100 |
| Annual Growth rate=((1.27/1.19)^(1/1)-1)*100 |
| Annual Growth rate% = 6.72 |
| Annual average growth rate=((last value/First value)^(1/Time between 1st and last value)-1)*100 |
| Annual Growth rate=((1.37/1.27)^(1/1)-1)*100 |
| Annual Growth rate% = 7.87 |
| Annual average growth rate=((last value/First value)^(1/Time between 1st and last value)-1)*100 |
| Annual Growth rate=((1.42/1.37)^(1/1)-1)*100 |
| Annual Growth rate% = 3.65 |
| Year | Div growth rate |
| 1 | 7.84% |
| 2 | 8.18% |
| 3 | 6.72% |
| 4 | 7.87% |
| 5 | 3.65% |
| Average= | 6.85% |
| Where |
| Average or Mean = Sum of all observations/Count of all observations |
| Future value = present value*(1+ rate)^time |
| Future value = 1.42*(1+0.0685)^1 |
| Future value = 1.52 |
| Using Calculator: press buttons "2ND"+"FV" then assign |
| PV =-1.42 |
| I/Y =6.85 |
| N =1 |
| PMT = 0 |
| CPT FV |
| Using Excel |
| =FV(rate,nper,pmt,pv,type) |
| =FV(0.0685,1,,-1.42,) |
| Price in 1 year= dividend in 1 year* (1 + growth rate )/(cost of equity - growth rate) |
| Price = 1.52 * (1+0.0685) / (0.1423 - 0.0685) |
| Price = 22.01 |
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