Question

			Inputs	Present
				Value
Current stock Price			$      62.00
Risk Free			2.5%
Beta			1.1
Expected Market Return			7.0%
Dividend growth rate			6.0%
Required Rate of Return
				PV	Dividend
This Year's Dividend		This Year	$        0.80		Growth
		Next Year	$        0.92		15%
		2	$        1.06		15%
		3	$        1.22		15%
	Future Stock Price	3			6.0%
Intrinsic Value	Intrinsic Value

Answer 1

From the give data,

Required return of the stock can be calculated using CAPM model

Ke = Rf + Beta*(Rm-Rf) = 2.5 + 1.1*(4-2.5) = 7.45%

Next, Future stock value can be calculated using constant dividend growth model

So, future stock price at year 3 = D3*(1+g)/(Ke-g) = 1.22*(1.06)/(0.0745-0.06) = $88.94

Now, PV is calculated using PV = FV/(1+Ke)^t

So, PV of next year stock = 0.92/1.0745 = $0.86

PV of year 2 dividend = 1.06/1.0745^2 = $0.92

PV of year 3 dividend = 1.22/1.0745^3 = $0.98

PV of future stock price at year 3 = 88.94/1.0745^3 = $71.70

So total intrinsic value of stock = 0.86 + 0.92 + 0.98 + 71.70 = $74.45

All the calculation are also solved on excel, and image are attach below: