Question

P7-23 (similar to) Question Help Integrative-Risk and valuation Giant Enterprises' stock has a required return of 14.4%. The company, which plans to pay a dividend of $2.57 per share in the coming year, anticipates that its future dividends will increase at an annual rate consistent with that experienced over 2013-2019 period, when the following dividends were paid: B a. If the risk-free rate is 4%, what is the risk premium on Giant's stock? b. Using the constant-growth model, estimate the value of Giant's stock. (Hint: Round the computed dividend growth rate to the nearest whole percent.) c. Explain what effect, if any, a decrease in the risk premium would have on the value of Giant's stock. a. If the risk-free rate is 4%, the risk premium on Giant's stock is 10.4 %. (Round to one decimal place.) b. Using the constant-growth model, the value of Giant's stock is $ (Round to the nearest cent.)

Answer 1

b. Growth rate = (2019 dividend/2013 dividend )^(1/n)

= (2.42/1.71)^(1/6) -1

= 1.0596-1

= 0.0596 or 5.96%

Value of Giant stock = Div_{​​​​1} /(r-g)

= 2.57/(0.144-0.0596)

= 30.45$

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