Question

In: Finance

The risk-free rate is 3.99% and the market risk premium is 5.45%. A stock with a...

The risk-free rate is 3.99% and the market risk premium is 5.45%. A stock with a β of 1.66 just paid a dividend of $1.69. The dividend is expected to grow at 22.79% for three years and then grow at 4.25% forever. What is the value of the stock? round to 2 decimals

Solutions

Expert Solution

The value of the stock is computed as shown below:

= Dividend in year 1 / (1 + required rate of return)1 + Dividend in year 2 / (1 + required rate of return)2 + Dividend in year 3 / (1 + required rate of return)3 + 1 / (1 + required rate of return)3 [ ( Dividend in year 3 (1 + growth rate) / ( required rate of return - growth rate) ]

Required rate of return is computed as shown below:

= risk free rate + beta x market risk premium

= 0.0399 + 1.66 x 0.0545

= 13.037% or 0.13037

So, the value of the stock is computed as follows:

= ($ 1.69 x 1.2279) / 1.13037 + ($ 1.69 x 1.22792) / 1.130372 + ($ 1.69 x 1.22793) / 1.130373 + 1 / 1.130373 [ ($ 1.69 x 1.22793 x 1.0425) / ( 0.13037 - 0.0425) ]

= $ 2.075151 / 1.13037 + $ 2.548077913 / 1.130372 + $ 3.128784869 / 1.130373 + 1 / 1.130373 [ ($ 37.12027115) ]

= $ 2.075151 / 1.13037 + $ 2.548077913 / 1.130372 + $ 40.24905602 / 1.130373

= $ 31.70 Approximately

Feel free to ask in case of any query relating to this question

  


Related Solutions

The risk-free rate is 1.27% and the market risk premium is 7.65%. A stock with a...
The risk-free rate is 1.27% and the market risk premium is 7.65%. A stock with a β of 1.34 just paid a dividend of $1.29. The dividend is expected to grow at 20.50% for three years and then grow at 4.96% forever. What is the value of the stock? The risk-free rate is 1.13% and the market risk premium is 9.58%. A stock with a β of 1.16 just paid a dividend of $1.86. The dividend is expected to grow...
The risk-free rate is 1.86% and the market risk premium is 7.72%. A stock with a...
The risk-free rate is 1.86% and the market risk premium is 7.72%. A stock with a β of 1.74 just paid a dividend of $2.78. The dividend is expected to grow at 22.07% for five years and then grow at 4.02% forever. What is the value of the stock? Answer format: Currency: Round to: 2 decimal places.
The risk-free rate is 2.37% and the market risk premium is 6.39%. A stock with a...
The risk-free rate is 2.37% and the market risk premium is 6.39%. A stock with a β of 1.60 just paid a dividend of $2.67. The dividend is expected to grow at 21.99% for three years and then grow at 3.53% forever. What is the value of the stock? The answer is $48.21 but not sure how to get that answer. Please show the finance calculator steps if possible and not excel! Thanks
The risk-free rate is 1.25% and the market risk premium is 5.78%. A stock with a...
The risk-free rate is 1.25% and the market risk premium is 5.78%. A stock with a β of 0.84 just paid a dividend of $2.17. The dividend is expected to grow at 20.45% for three years and then grow at 4.90% forever. What is the value of the stock? Submit Answer format: Currency: Round to: 2 decimal places. unanswered not_submitted Attempts Remaining: Infinity #2 The risk-free rate is 1.04% and the market risk premium is 8.82%. A stock with a...
The risk-free rate is 2.43% and the market risk premium is 8.12%. A stock with a...
The risk-free rate is 2.43% and the market risk premium is 8.12%. A stock with a β of 1.56 just paid a dividend of $1.36. The dividend is expected to grow at 23.91% for five years and then grow at 3.26% forever. What is the value of the stock? Answer format: Currency: Round to: 2 decimal places.
The risk-free rate is 2.89% and the market risk premium is 7.59%. A stock with a...
The risk-free rate is 2.89% and the market risk premium is 7.59%. A stock with a β of 1.59 just paid a dividend of $2.55. The dividend is expected to grow at 23.34% for five years and then grow at 3.79% forever. What is the value of the stock?
The risk-free rate is 1.15% and the market risk premium is 6.74%. A stock with a...
The risk-free rate is 1.15% and the market risk premium is 6.74%. A stock with a β of 1.31 just paid a dividend of $1.40. The dividend is expected to grow at 22.68% for three years and then grow at 4.35% forever. What is the value of the stock?
The risk-free rate is 2.11% and the market risk premium is 7.99%. A stock with a...
The risk-free rate is 2.11% and the market risk premium is 7.99%. A stock with a β of 1.30 just paid a dividend of $1.78. The dividend is expected to grow at 21.58% for three years and then grow at 3.74% forever. What is the value of the stock?
The risk-free rate is 3.89% and the market risk premium is 7.55%. A stock with a...
The risk-free rate is 3.89% and the market risk premium is 7.55%. A stock with a β of 1.70 just paid a dividend of $2.44. The dividend is expected to grow at 24.70% for five years and then grow at 3.29% forever. What is the value of the stock? Round to 2 decimal places.
The risk-free rate is 3.00% and the market risk premium is 7.50%. A stock with a...
The risk-free rate is 3.00% and the market risk premium is 7.50%. A stock with a β of 1.69 just paid a dividend of $1.82. The dividend is expected to grow at 22.07% for three years and then grow at 3.32% forever. What is the value of the stock? Answer format: Currency: Round to: 2 decimal places.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT