Question

A company currently pays a dividend of $2.25 per share (D0 = $2.25). It is estimated that the company's dividend will grow at a rate of 17% per year for the next 2 years, and then at a constant rate of 6% thereafter. The company's stock has a beta of 1.2, the risk-free rate is 6%, and the market risk premium is 4%. What is your estimate of the stock's current price? Do not round intermediate calculations. Round your answer to the nearest cent.

Answer 1

As per CAPM

expected return = risk-free rate + beta * (Market risk premium)

Expected return% = 6 + 1.2 * (4)

Expected return% = 10.8

	Required rate=	10.80%
Year	Previous year dividend	Dividend growth rate	Dividend current year	Horizon value	Total Value	Discount factor	Discounted value
1	2.25	17.00%	2.6325		2.6325	1.108	2.3759
2	2.6325	17.00%	3.080025	68.017	71.097025	1.227664	57.91245
	Long term growth rate (given)=	6.00%			Value of Stock =	Sum of discounted value =	60.29

Where
Current dividend =Previous year dividend*(1+growth rate)^corresponding year
Total value = Dividend + horizon value (only for last year)
Horizon value = Dividend Current year 2 *(1+long term growth rate)/( Required rate-long term growth rate)
Discount factor=(1+ Required rate)^corresponding period
Discounted value=total value/discount factor