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Nonconstant Growth Valuation A company currently pays a dividend of $3.75 per share (D0 = $3.75)....

Nonconstant Growth Valuation

A company currently pays a dividend of $3.75 per share (D0 = $3.75). 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 7% thereafter. The company's stock has a beta of 1.95, the risk-free rate is 4%, 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 the nearest cent.

$_________?

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Answer #1

Ke = 4% + 1.95 * 6%

= 15.7%

D0 = $3.75

D1 = $3.75(1.25) = $4.6875

D2 = $3.75(1.25)2 = $5.8594

D3 = $5.8594(1.07) = $6.2696

PV of Dividend = $4.6875/(1.157) + $5.8594/(1.157)2

= $8.4285

P2 = 6.2696 / (0.157 - 0.07)

= $72.0644

PV = 72.0644/(1.157)2

= $53.8337

Share Price = $8.4285 + $53.8337

= $62.26

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