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Whizz Corp. has recently paid a dividend of $3 per share. You expect that the dividend...

Whizz Corp. has recently paid a dividend of $3 per share. You expect that the dividend will be $4 next year (t=1), increase 20% the following year (t=2), then grow at a rate of 5% indefinitely (after t=2). The company's debt are worth $75 million,and its debt is worth $75 million. The yield of maturity of the bond is 4%. Its beta is 2. You estimate that the risk-free rate is 5%,and the market risk premium is 5% as well. The company's tax rate is 0%. If your estimations are correct, what is the value of the stock today?

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Expert Solution

Year Growth rate Dividend computation Dividend PV factor @15%, 1/(1+r)^time Dividend * PV factor
1 $     4.00                    0.8696 $        3.48
2 20.00% 4*(1+20%) $     4.80                    0.7561 $        3.63
2 $   50.40                    0.7561 $      38.11
Current share price $      45.22
Risk free rate 5%
Market risk premium 5%
Beta 2
Cost of equity= Risk free rate + Beta * Market risk premium
Cost of equity= 5%+2*5%
Cost of equity= 15.00%
Current Dividend $         4.80
Rate of return 15.00%
Growth Rate 5.00%
Share Price at horizon =Current Dividend*(1+Growth rate)/(Rate of return-Growth Rate)
Share Price at horizon =4.8*(1+0.05)/(0.15-0.05)
Share Price at horizon $       50.40

ekkarill92 answered 1 year ago
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