In: Finance
C. A company does not pay any dividends for 5 years. Then, it starts paying $6 in year 6. This continues perpetually. What is the market price of the stock?
The bond rate , market premium and beta are .02, .06 and 1.8 respectively.
As per CAPM | |||||||
expected return = risk-free rate + beta * (Market risk premium) | |||||||
Expected return% = 2 + 1.8 * (6) | |||||||
Expected return% = 12.8 | |||||||
Required rate= | 12.00% | ||||||
Year | Previous year dividend | Dividend growth rate | Dividend current year | Horizon value | Total Value | Discount factor | Discounted value |
1 | 0 | 0.00% | 0 | 0 | 1.12 | 0 | |
2 | 0 | 0.00% | 0 | 0 | 1.2544 | 0 | |
3 | 0 | 0.00% | 0 | 0 | 1.404928 | 0 | |
4 | 0 | 0.00% | 0 | 0 | 1.57351936 | 0 | |
5 | 0 | 0.00% | 0 | 0 | 1.762341683 | 0 | |
6 | 0 | 0.00% | 6 | 50 | 56 | 1.973822685 | 28.37 |
Long term growth rate (given)= | 0.00% | Value of Stock = | Sum of discounted value = | 28.37 |
Where | |||
Total value = Dividend + horizon value (only for last year) | |||
Horizon value = Dividend Current year 6 *(1+long term growth rate)/( Required rate-long term growth rate) | |||
Discount factor=(1+ Required rate)^corresponding period | |||
Discounted value=total value/discount factor |