Problem 7-05 Nonconstant Growth Valuation A company currently pays a dividend of $3.25 per share (D0 = $3.25). It is estimated that the company's dividend will grow at a rate of 15% per year for the next 2 years, and then at a constant rate of 7% thereafter. The company's stock has a beta of 0.9, the risk-free rate is 5.5%, and the market risk premium is 5%. What is your estimate of the stock's current price? Do not round intermediate calculations. Round your answer to the nearest cent.
Required rate=risk free rate+Beta*market risk premium
=5.5+(0.9*5)=10%
D1=(3.25*1.15)=3.7375
D2=(3.7375*1.15)=4.298125
Value after year 2=(D2*Growth rate)/(Required rate-Growth rate)
=(4.298125*1.07)/(0.1-0.07)
=153.299792
Hence current price=Future dividend and value*Present value of discounting factor(rate%,time period)
=3.7375/1.1+4.298125/1.1^2+153.299792/1.1^2
=$133.64(Approx).
Problem 7-05 Nonconstant Growth Valuation A company currently pays a dividend of $3.25 per share (D0...
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