Question

A company currently pays a dividend of $3.6 per share (D0 = $3.6). It is estimated that the company's dividend will grow at a rate of 25% per year for the next 2 years, and then at a constant rate of 8% thereafter. The company's stock has a beta of 1.1, the risk-free rate is 9.5%, and the market risk premium is 4.5%. What is your estimate of the stock's current price? Do not round intermediate calculations. Round your answer to the nearest cent.

Answer 1

Company's stock has a beta of 1.1

Risk free rate is 9.5%

Market risk premium is 4.5%

 

Calculation of required rate of return of company as per CAPM model is as follows:

 

Calculation of Stock's current price is as follows:

Company currently pays a dividend of $3.6 per share

 

Dividend will grow at the rate of 25% per year for the next 2 years and then at the rate of constant 8% thereafter

 

Calculation of dividend for the next 2 years is as follows:

 

Calculation of stock's current price as per Dividend Growth Model is as follows:

D1 = $4.5

D2 = $5.625

g2 = 0.08

r = required rate of return = 0.1445

 

So estimated stock's current price is $80.13.

So estimated stock's current price is $80.13.