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1. Stewart Industries expects to pay a $3.00 per share dividend on its common stock at...

1. Stewart Industries expects to pay a $3.00 per share dividend on its common stock at the end of the year. The dividend is expected to grow 25 percent a year until t = 3, after which time the dividend is expected to grow at a constant rate of 5 percent a year. Stewart’s beta is 1.25, the market risk premium is 8% and the risk-free rate is 2.3%. What is the company’s current stock price? (Please use Excel to do time value calculation). What will be the stock price two year from today?

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Answer #1

the required return is calculated using Capital asset Pricing Model(CAPM)

required return, r = risk free rate + (beta*market risk premium)

stock price 2 year from now = (D3+TV)/((1+r)3)

where; D3 = dividend at the end of t= 3

TV = terminal value

stock price today= sum of Present value of expected dividends

1 expected dividend 2 growth rate till t-3 3 growth rate after t 3 4 beta 5 market risk premium 6 risk free rate 7 required return 8 terminal value time,t dividends present va 2.671416 2.973526 3.309802 1 0.25 0.05 1.25 0.08 0.023 0.123 67.42295 3.75 4.68754.921875 10 stock price toda 56.56 stock price two years 11 from today 12 13 64.21

1 expected dividend 2 growth rate till t 3 3 growth rate after t3 4 beta 5 market risk premium 6 risk free rate 7 required return 8 terminal value time,t dividends present value 4 -B1 -F2(1+SB$2) -G2*(1+$B$3) 0.25 0.05 1.25 0.08 0.023 -86+(84 B5) -H2/(B7-B3) 10 stock price today -E3+F3+G3+(B8/((1+B7)AG1) 11 stock price two years from today ((G2+B8)/(1+B7)) 12 13

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