Question

You want to buy Burrito Inc. stock. They pay annual dividends, with the next dividend of $0.45 per share being paid later today. You believe that, during the next 10 years, their annual dividends will grow by 45% APR, compounded annually. But after 10 years, their annual dividends will grow more slowly... only at 4% APR, compounded annually. Burrito Inc. has a beta of 1.78. The risk-free rate of return is 3%, and the average risk premium is 6%. What should be the price of a share of Burrito stock? (You can assume that the return given by the CAPM is compounded annually)."

I am actually confused whether to take 0.45 as D0 or D1....plz solve the qn

Answer 1

0.45 is D0, there needs to be a time gap of 1 year for it to be D1

Following is schedule for the Price:

Year	Dividend calculation	Dividend	Discounted dividend calculation	Discounted dividend
1	0.45x(1+45%)^1=	$   0.65	0.65/(1+13.68%)^1=	$   0.57
2	0.45x(1+45%)^2=	$   0.95	0.94/(1+13.68%)^2=	$   0.73
3	0.45x(1+45%)^3=	$   1.37	1.37/(1+13.68%)^3=	$   0.93
4	0.45x(1+45%)^4=	$   1.99	1.98/(1+13.68%)^4=	$   1.19
5	0.45x(1+45%)^5=	$   2.88	2.88/(1+13.68%)^5=	$   1.52
6	0.45x(1+45%)^6=	$   4.18	4.18/(1+13.68%)^6=	$   1.94
7	0.45x(1+45%)^7=	$   6.06	6.06/(1+13.68%)^7=	$   2.47
8	0.45x(1+45%)^8=	$   8.79	8.79/(1+13.68%)^8=	$   3.15
9	0.45x(1+45%)^9=	$ 12.75	12.75/(1+13.68%)^9=	$   4.02
10	0.45x(1+45%)^10=	$ 18.49	18.49/(1+13.68%)^10=	$   5.13
10	0.45x(1+45%)^10 x 1.04=	$ 19.23	19.23/(0.1368-0.04)/(1+13.68%)^10=	$ 55.11
			Price = Sum of discounted dividend column	$ 76.77