A company currently pays a dividend of $2.00 per share (i.e., D0=$2.0). It is estimated that company's dividend will grow at a rate of 20% per year for the next three years, and the the dividend will grow at a constant rate of 4% thereafter. The company's stock has a beta of 1.5, the risk-free rate is 6%, and the market return is 12.50%. What is your estimate of the company's stock price at the end of year 3 (i.e., P3)?
| 1. |
$37.569 |
|
| 2. |
None of the answers given are correct. |
|
| 3. |
$30.536 |
|
| 4. |
$35.00 |
|
| 5. |
$25.00 |
Expected return = risk free rate + beta * market risk premium
= 6% + 1.5 * (12.5% - 6%)
= 15.75%
value of stock = Present value of dividends + Horizontal value
Horizontal value = dividend next year/(Required return - growth rate)
=>
Price at year 3 P3 = D4/(r-g)
= 2*1.2^3*1.04/(0.1575 - 0.04)
= 30.536
choose 3)
A company currently pays a dividend of $2.00 per share (i.e., D0=$2.0). It is estimated that...
A company currently pays a dividend of $2.00 per share (i.e., D0=$2.0). It is estimated that company's dividend will grow at a rate of 20% per year for the next three years, and the the dividend will grow at a constant rate of 4% thereafter. The company's stock has a beta of 1.5, the risk-free rate is 6%, and the market return is 12.50%. What is your estimate of the company's current stock price, P0? 1. $26.136 2. $30.536 3....
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