3. A rapidly growing firm is currently paying a dividend of $4.00. The dividend growth rate...

3. A rapidly growing firm is currently paying a dividend of $4.00. The dividend growth rate is expected to be 8% for the next 3 years. The dividend growth rate after the first 3 years is expected to be 2% annually. The expected return on the market is 7%, the risk free rate is 3% and the firm’s Beta is 1.20.

a. Calculate the estimated price (intrinsic value) for a share of this firm’s stock.

b. What does this firm’s Beta indicate about the firm’s overall riskiness?

c. Use Goal Seek to determine what the expected return of the market would need to be to yield an estimated price (intrinsic value) of $100.

Expert Solution

a)

b)

The Beta of the firm is 1.2 which indicates that it is riskier than the market or benchmark index. In other words, when the market returns change by 1 unit, the stock returns will change by 1.2 units

c)

Expected market return should be 6.17% , for the intrinsic value of stock to be $ 100

Formulae

jeff jeffy answered 1 year ago

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