A company currently pays a dividend of $2.8 per share (D0 = $2.8). It is estimated that the company's dividend will grow at a rate of 15% per year for the next 2 years, and then at a constant rate of 7% thereafter. The company's stock has a beta of 1.6, the risk-free rate is 9.5%, and the market risk premium is 6.5%. What is your estimate of the stock's current price? Do not round intermediate calculations. Round your answer to the nearest cent.
The stock's current price is computed as shown below:
= Dividend in year 1 / (1 + required rate of return)1 + Dividend in year 2 / (1 + required rate of return)2 + 1 / (1 + required rate of return)2 [ ( Dividend in year 2 (1 + growth rate ) / ( required rate of return - growth rate) ]
The required rate of return is computed as follows:
= risk free rate + Beta x market risk premium
= 0.095 + 1.6 x 0.065
= 19.9% or 0.199
So, the stock's current price will be as follows:
= ($ 2.8 x 1.15) / 1.1991 + ($ 2.8 x 1.152) / 1.1992 + 1 / 1.1992 [ ($ 2.8 x 1.152 x 1.07) / ( 0.199 - 0.07) ]
= $ 3.22 / 1.199 + $ 3.703 / 1.1992 + $ 30.7148062 / 1.1992
= $ 26.63 Approximately
Feel free to ask in case of any query relating to this question
A company currently pays a dividend of $2.8 per share (D0 = $2.8). It is estimated...
A company currently pays a dividend of $2.8 per share (D0 = $2.8). 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 1.2, the risk-free rate is 7%, and the market risk premium is 2.5%. What is your estimate of the stock's current price? Do not round intermediate calculations. Round your answer...
A company currently pays a dividend of $2.4 per share (D0 = $2.4). It is estimated that the company's dividend will grow at a rate of 17% per year for the next 2 years, and then at a constant rate of 5% thereafter. The company's stock has a beta of 1.5, the risk-free rate is 9.5%, and the market risk premium is 6%. What is your estimate of the stock's current price? Do not round intermediate calculations. Round your answer...
A company currently pays a dividend of $3.8 per share (D0 = $3.8). It is estimated that the company's dividend will grow at a rate of 19% per year for the next 2 years, and then at a constant rate of 5% thereafter. The company's stock has a beta of 1.6, the risk-free rate is 7%, and the market risk premium is 3.5%. What is your estimate of the stock's current price? Do not round intermediate calculations. Round your answer...
A company currently pays a dividend of $4 per share (D0 = $4). It is estimated that the company's dividend will grow at a rate of 25% per year for the next 2 years, then at a constant rate of 5% thereafter. The company's stock has a beta of 1.9, the risk-free rate is 3%, and the market risk premium is 6%. What is your estimate of the stock's current price? Do not round intermediate calculations. Round your answer to...
A company currently pays a dividend of $2.25 per share (D0 = $2.25). It is estimated that the company's dividend will grow at a rate of 24% per year for the next 2 years, and then at a constant rate of 5% thereafter. The company's stock has a beta of 0.95, the risk-free rate is 8%, and the market risk premium is 3%. What is your estimate of the stock's current price? Do not round intermediate calculations. Round your answer...
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 18% per year for the next 2 years, and then at a constant rate of 5% thereafter. The company's stock has a beta of 1.25, the risk-free rate is 8%, and the market risk premium is 6%. What is your estimate of the stock's current price? Do not round intermediate calculations. Round your answer...
A company currently pays a dividend of $3.5 per share (D0 = $3.5). It is estimated that the company's dividend will grow at a rate of 25% per year for the next 2 years, and then at a constant rate of 5% thereafter. The company's stock has a beta of 0.9, the risk-free rate is 3%, and the market risk premium is 6%. What is your estimate of the stock's current price? Do not round intermediate calculations. Round your answer...
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 24% per year for the next 2 years, then at a constant rate of 5% thereafter. The company's stock has a beta of 1.9, the risk-free rate is 5%, and the market risk premium is 3%. What is your estimate of the stock's current price? Do not round intermediate calculations. Round your answer to...
A company currently pays a dividend of $2.4 per share (D0 = $2.4). It is estimated that the company's dividend will grow at a rate of 22% per year for the next 2 years, and then at a constant rate of 7% thereafter. The company's stock has a beta of 1.5, the risk-free rate is 8%, and the market risk premium is 3%. What is your estimate of the stock's current price? Do not round intermediate calculations. Round your answer...
A company currently pays a dividend of $1.75 per share (D0 = $1.75). It is estimated that the company's dividend will grow at a rate of 18% per year for the next 2 years, and then at a constant rate of 6% thereafter. The company's stock has a beta of 0.9, the risk-free rate is 7%, and the market risk premium is 3%. What is your estimate of the stock's current price? Do not round intermediate calculations. Round your answer...