The risk-free rate is 2.72% and the market risk premium is 9.28%. A stock with a β of 1.25 just paid a dividend of $2.89. The dividend is expected to grow at 20.25% for five years and then grow at 3.90% forever. What is the value of the stock?
Please round to 2 decimal places.
Value of Stock = PV of CFs from it.
Required Ret = Rf + Beta ( Market risk Premium )
= 2.72% + 1.25 ( 9.28%)
= 2.72% + 11.6%
= 14.32%
Div Calculation:
Year | Particulars | CF | Formula | Calculation |
1 | D1 | $ 3.48 | D0(1+g) | 2.89*1.2025 |
2 | D2 | $ 4.18 | D1(1+g) | 3.48*1.2025 |
3 | D3 | $ 5.03 | D2(1+g) | 4.18*1.2025 |
4 | D4 | $ 6.04 | D3(1+g) | 5.03*1.2025 |
5 | D5 | $ 7.27 | D4(1+g) | 6.04*1.2025 |
6 | D6 | $ 7.55 | D5(1+g) | 7.27*1.0390 |
P5 = D6 / [ Ke - g ]
= $ 7.55 / [ 14.32% - 3.9% ]
= $ 7.55 / 10.42%
= $ 72.46
P0 Calculation:
Year | Particulars | CF | PVF @14.32% | Disc CF |
1 | D1 | $ 3.48 | 0.874738 | $ 3.04 |
2 | D2 | $ 4.18 | 0.765166 | $ 3.20 |
3 | D3 | $ 5.03 | 0.669319 | $ 3.36 |
4 | D4 | $ 6.04 | 0.585479 | $ 3.54 |
5 | D5 | $ 7.27 | 0.51214 | $ 3.72 |
5 | P5 | $ 72.46 | 0.51214 | $ 37.11 |
Share Price | $ 53.97 |
The risk-free rate is 2.72% and the market risk premium is 9.28%. A stock with a...
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