Please help me with this question?
8–5- Nonconstant Growth Valuation A company currently pays a dividend of $2 per share (D0 5 $2). It is esti- mated that the company’s dividend will grow at a rate of 20% per year for the next 2 years, and then at a constant rate of 7% thereafter. The company’s stock has a beta of 1.2, the risk-free rate is 7.5%, and the market risk premium is 4%. What is your estimate of the stock’s current price?
Ke or cost of equity = Risk free rate + Beta*Risk premium’
= 7.5% + 1.2*4
= 12.3%
Stock Price = present value of all dividends
= 2.4/(1+0.123) + 2.88/(1+0.123)2+2.88(1+0.07)/(0.123-0.007)(1+0.123)2
= 2.4*0.890 + 2.88*0.793 + 58.14*0.793
= $50.52486
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