Question

#2

The risk-free rate is 1.63% and the market risk premium is 8.28%. A stock with a β of 0.96 just paid a dividend of $1.30. The dividend is expected to grow at 20.12% for three years and then grow at 3.51% forever. What is the value of the stock?

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Answer format: Currency: Round to: 2 decimal places.

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#3

The risk-free rate is 1.30% and the market risk premium is 9.13%. A stock with a β of 1.23 just paid a dividend of $2.17. The dividend is expected to grow at 20.39% for five years and then grow at 3.41% forever. What is the value of the stock?

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Answer format: Currency: Round to: 2 decimal places.

Answer 1

2. The value of the stock is computed as shown below:

Required rate of return will be computed as follows:

Risk free rate + beta x risk premium

= 0.0163 + 0.96 x 0.0828

= 9.5788%

Dividend at end of year 1 will be as follows:

= $ 1.30 x 1.2012

= $ 1.56156

Dividend at end of year 2 will be as follows:

= $ 1.30 x 1.2012²

= $ 1.87575 Approximately

Dividend at end of year 3 will be as follows:

= $ 1.30 x 1.2012³

= $ 2.25315 Approximately

Dividend at end of year 4 will be as follows:

= $ 2.25315 x 1.0351

= $ 2.33224 Approximately

So the price will be:

Dividend at end of year 1 / ( 1 + required rate of return )¹ + Dividend at end of year 2 / ( 1 + required rate of return )² + Dividend at end of year 3 / ( 1 + required rate of return )³ + 1 / ( 1 + required rate of return )³ [ Dividend at end of year 4 / (Required rate of return - growth rate ) ]

= $ 1.56156 / 1.095788¹ + $ 1.87575 / 1.095788² + $ 2.25315 / 1.095788³ + 1 / 1.095788³ [ $ 2.33224 / ( 0.095788 - 0.0351 ) ]

= $ 33.91 Approximately

3. The value of the stock is computed as shown below:

Required rate of return will be computed as follows:

Risk free rate + beta x risk premium

= 0.0130 + 1.23 x 0.0913

= 12.5299%

Dividend at end of year 1 will be as follows:

= $ 2.17 x 1.2039

= $ 2.61246 Approximately

Dividend at end of year 2 will be as follows:

= $ 2.17 x 1.2039²

= $ 3.14514 Approximately

Dividend at end of year 3 will be as follows:

= $ 2.17 x 1.2039³

= $ 3.78644 Approximately

Dividend at end of year 4 will be as follows:

= $ 2.17 x 1.2039⁴

= $ 4.55849 Approximately

Dividend at end of year 5 will be as follows:

= $ 2.17 x 1.2039⁵

= $ 5.48797 Approximately

Dividend at end of year 6 will be as follows:

= $ 5.48797 x 1.0341

= $ 5.67511 Approximately

So the price will be:

Dividend at end of year 1 / ( 1 + required rate of return )¹ + Dividend at end of year 2 / ( 1 + required rate of return )² + Dividend at end of year 3 / ( 1 + required rate of return )³ + Dividend at end of year 4 / ( 1 + required rate of return )⁴ + Dividend at end of year 5 / ( 1 + required rate of return )⁵ + 1 / ( 1 + required rate of return )⁵ [ Dividend at end of year 6 / (Required rate of return - growth rate ) ]

= $ 2.61246 / 1.125299¹ + $ 3.14514 / 1.125299² + $ 3.78644 / 1.125299³ + $ 4.55849 / 1.125299⁴ + $ 5.48797 / 1.125299⁵ + 1 / 1.125299⁵ [ $ 5.67511 / ( 0.125299 - 0.0341 ) ]

= $ 47.83 Approximately

Feel free to ask in case of any query relating to this question