Question

The risk-free rate is 3.80% and the market risk premium is 6.93%. A stock with a β of 1.30 just paid a dividend of $2.45. The dividend is expected to grow at 20.51% for five years and then grow at 4.52% forever. What is the value of the stock? Round to the 2 decimal place

Answer 1

Year Required return = 12.81% 0.038+(1.3*0.0693) present value factor of 12.81% 0.88645 0.78580 0.69658 0.61748 0.54737 Cash flows $2.95 $3.56 $4.29 $5.17 $6.23 $78.52 3 4 Present value (cash flows x present value factor ] $2.62 $2.80 $2.99 $3.19 $3.41 $42.98 $57.98 Price at year 5 (6.23*1.0452)/(0.1281-0.0452) Value of stock today