Question

Nonconstant Dividend Growth Valuation A company currently pays a dividend of $3.8 per share (D0 = $3.8). It is estimated that the company's dividend will grow at a rate of 24% per year for the next 2 years, and then at a constant rate of 5% thereafter. The company's stock has a beta of 1.4, the risk-free rate is 6.5%, and the market risk premium is 2%.

What is your estimate of the stock's current price? Do not round intermediate calculations. Round your answer to the nearest cent.

Answer 1

As per CAPM

expected return = risk-free rate + beta * (Market risk premium)

Expected return% = 6.5 + 1.4 * (2)

Expected return% = 9.3

	Required rate=	9.30%
Year	Previous year dividend	Dividend growth rate	Dividend current year	Horizon value	Total Value	Discount factor	Discounted value
1	3.8	24.00%	4.712		4.712	1.093	4.3111
2	4.712	24.00%	5.84288	142.675	148.51788	1.194649	124.31926
	Long term growth rate (given)=	5.00%			Value of Stock =	Sum of discounted value =	128.63
Where
Current dividend =Previous year dividend*(1+growth rate)^corresponding year
Total value = Dividend + horizon value (only for last year)
Horizon value = Dividend Current year 2 *(1+long term growth rate)/( Required rate-long term growth rate)
Discount factor=(1+ Required rate)^corresponding period
Discounted value=total value/discount factor