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 the nearest cent.
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As per CAPM |
expected return = risk-free rate + beta * (Market risk premium) |
Expected return% = 3 + 1.9 * (6) |
Expected return% = 14.4 |
Required rate= | 14.40% | ||||||
Year | Previous year dividend | Dividend growth rate | Dividend current year | Horizon value | Total Value | Discount factor | Discounted value |
1 | 4 | 25.00% | 5 | 5 | 1.144 | 4.3706 | |
2 | 5 | 25.00% | 6.25 | 69.814 | 76.064 | 1.308736 | 58.1202 |
Long term growth rate (given)= | 5.00% | Value of Stock = | Sum of discounted value = | 62.49 | |||
Where | |||||||
Current dividend =Previous year dividend*(1+growth rate)^corresponding year | |||||||
Total value = Dividend + horizon value (only for last year) | |||||||
Horizon value = Dividend Current year 2 *(1+long term growth rate)/( Required rate-long term growth rate) | |||||||
Discount factor=(1+ Required rate)^corresponding period | |||||||
Discounted value=total value/discount factor |
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