DMH Enterprise�s stock dividends are expected to grow at a rate of 25% for three years, after which dividends are expected to grow at a constant rate of 10% forever. The company recently paid a dividend of $2 and the required rate of return on the stock is 12%, what is the stock�s current price?
$115.41 |
|
$128.54 |
|
$144.15 |
|
$160.54 |
You are charged with the valuation of Hurst Company�s stock. You have access to the following information: Hurst dividends are expected to grow at a rate of 10% for the next three years, after which growth will taper to a constant rate of 5%. Hurst�s beta is 1.5, the current yield on Treasury bills is 3% and the return on the market is 7%. If Hurst Company is expected to pay a dividend of $2.25 at the end of the year, what is the stock�s current price?
$57.09 |
|
$61.66 |
|
$62.69 |
|
$67.71 |
Stock price is equal to the present value of all future dividends
= 2(1.25)/(1.12) + 2(1.25)^2/(1.12)^2 + 2(1.25)^3/(1.12)^3 + 2(1.25)^3(1.10)/(1.12)^3(12%-10%)
= $160.43
i.e. $160.54 approx.
Required return as per CAPM = Risk free rate + beta*(Market return – risk free rate)
= 3% + 1.5*(7%-3%)
= 9%
Value of stock = 2.25/(1.09)+2.25(1.10)/(1.09)^2 + 2.25(1.10)^2/(1.09)^3 + 2.25(1.10)^2(1.05)/(1.109)^3(9%-5%)
= $61.43
i.e. $61.66 approx.
DMH Enterprise�s stock dividends are expected to grow at a rate of 25% for three years,...
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