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A company is expected to pay a dividend of $1.06 per share one year from now...

A company is expected to pay a dividend of $1.06 per share one year from now and $1.66 in two years. You estimate the risk-free rate to be 3.3% per year and the expected market risk premium to be 5.6% per year. After year 2, you expect the dividend to grow thereafter at a constant rate of 4% per year. The beta of the stock is 1.3, and the current price to earnings ratio of the stock is 13. What would be an appropriate estimate of the stock price today? (Answer to the nearest penny, i.e. 55.55 but do not use a $ sign).

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Answer #1

0.033+1.3*0.056 10.58% Cash flows $1.06 $1.66 $26.24 Year pv @ 10.58%, Present value 0.9043 0.8178 (1.66*1.04)/(0.1058-0.04)0.8178 $0.96 $1.36 $21.46 $23.77 2 Price at year 2 Stocks current price

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