McGaha Enterprises expects earnings and dividends to grow at a rate of 29% for the next...

McGaha Enterprises expects earnings and dividends to grow at a rate of 29% for the next 4 years, after the growth rate in earnings and dividends will fall to zero, i.e., g = 0. The company's last dividend, D0, was $1.25, its beta is 1.20, the market risk premium is 5.50%, and the risk-free rate is 3.00%. What is the current price of the common stock?

Solutions

Expert Solution

Current price of the common stock is $ 7.64

As per dividend discount model, current share price is present value of future dividends.

Year	Dividend	Discount factor	Present Value
a	b	c=1.096^-a	d=b*c
1	$ 1.61	0.912409	$ 1.47
2	$ 2.08	0.83249	$ 1.73
3	$ 2.68	0.759571	$ 2.04
4	$ 3.46	0.693039	$ 2.40

Total			$ 7.64

So, current price of common stock is $ 7.64

Working:

As per Capital Asset Pricing Model,

Required return	=	Risk free rate	+	Beta	*	market risk premium
	=	3.00%	+	1.20	*	5.50%
	=	9.60%

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

MGM Enterprises expects earnings and dividends to grow at a rate of 25% for the next...

MGM Enterprises expects earnings and dividends to grow at a rate of 25% for the next 4 years, after that the growth rate in earnings and dividends will fall to zero, i.e., g = 0. The company's last dividend, D0, was $1.25, its beta is 1.20, the market risk premium is 5.50%, and the risk-free rate is 3.00%. What is the current price of the common stock?

McGaha Enterprises expects earnings and dividends to grow at a rate of 40% for the next...

McGaha Enterprises expects earnings and dividends to grow at a rate of 40% for the next 4 years, after the growth rate in earnings and dividends will fall to zero, i.e., g = 0. The company's last dividend, D0, was $1.25, its beta is 1.20, the market risk premium is 5.50%, and the risk-free rate is 3.00%. What is the current price of the common stock? Select the correct answer. a. $44.24 b. $44.98 c. $45.72 d. $43.50 e. $46.46

Zeta Inc. expects earnings dividends to to grow at an annual rate of 20,15, and 10...

Zeta Inc. expects earnings dividends to to grow at an annual rate of 20,15, and 10 percent respectively over the next three years after which the company settles into a constant growth pattern of 5% per year indefinitely. If current dividend is $2 per share and investors require a 16% annual return on Vega stock, what is a fair price for a share of Vega's stock today? In excel please. thank you.

Magnetic Corporation expects dividends to grow at a rate of 17% for the next two years....

Magnetic Corporation expects dividends to grow at a rate of 17% for the next two years. After two years dividends are expected to grow at a constant rate of 6.1%, indefinitely. Magnetic’s required rate of return is 11.2% and they paid a $1.65 dividend today. What is the value of Magnetic Corporation’s common stock per share? (Show your answers to the nearest cent) What is Dividend at end of year 1: What is Dividend at end of year 2: What...

Magnetic Corporation expects dividends to grow at a rate of 19.9% for the next two years....

Magnetic Corporation expects dividends to grow at a rate of 19.9% for the next two years. After two years, dividends are expected to grow at a constant rate of 6.4%, indefinitely. Magnetic’s required rate of return is 14.6% and they paid a $1.36 dividend today. What is the value of Magnetic Corporation’s common stock per share today? (Show your answers to the nearest cent.)

Magnetic Corporation expects dividends to grow at a rate of 17% for the next two years....

Magnetic Corporation expects dividends to grow at a rate of 17% for the next two years. After two years dividends are expected to grow at a constant rate of 6.1%, indefinitely. Magnetic’s required rate of return is 11.2% and they paid a $1.65 dividend today. What is the value of Magnetic Corporation’s common stock per share? (Show your answers to the nearest cent) Dividend at end of year 1: Dividend at end of year 2: Dividend at end of year...

Zeta Inc. expects earnings/dividends to grow at an annual rate of 20, 15, and 10 percent...

Zeta Inc. expects earnings/dividends to grow at an annual rate of 20, 15, and 10 percent respectively over the next three years after which the company settles into a constant growth pattern of 5 percent per year indefinitely. If current dividend is $ 2 per share and investors require a 16 percent annual return on Vega stock, what is a fair price for a share of Vega's stock today?

Question text Roadrunner Enterprises is expected to grow its dividends and earnings at various rates. The...

Question text Roadrunner Enterprises is expected to grow its dividends and earnings at various rates. The company just paid a cash dividend of $2.50 per share. The company expects to grow its dividend at 14% for the next two years, then at 12% for the following three years, after which the company expects to grow at a constant rate of 10% per year indefinitely. The required rate of return on Roadrunner's common stock is 15%. What are the dividends in...

Synovec Co. is growing quickly. Dividends are expected to grow at a rate of 29 percent...

Synovec Co. is growing quickly. Dividends are expected to grow at a rate of 29 percent for the next 3 years, with the growth rate falling off to a constant 8 percent thereafter. If the required return is 15 percent and the company just paid a $3.60 dividend. what is the current share price?

The earnings and dividends of Ned Computer Co. are expected to grow at an annual rate...

The earnings and dividends of Ned Computer Co. are expected to grow at an annual rate of 15 percent over the next 4 years and then slow to a constant growth rate of 8 percent per year. Ned currently pays a dividend of $1 per share. What is the value of Ned stock to an investor who requires a 12 percent rate of return? Hints: 1) Calculate dividend for year 1 ~ 4 2) Terminal value at the end of...

Subjects