Question

Suppose the dividends for the Seger Corporation over the past six years were $1.00, $1.08, $1.17, $1.25, $1.35, and $1.40, respectively. Compute the expected share price at the end of 2014 using the perpetual growth method. Assume the market risk premium is 7.5 percent, Treasury bills yield 3 percent, and the projected beta of the firm is 1.10. (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "$" sign in your response.) Need assistance with calculating the dividend growth rates

Answer 1

Growth rate:

= ($1.40/$1)^(1/5)-1

= 6.96%

Required return (CAPM) = Rf+β×Rp

Rf is risk free return

Rp is risk premium

= 3%+1.1×7.5%

= 11.25%

Stock price, P0 = D1÷(r-g)

D1 is next expected dividend

r is required return

g is growth rate

= $1.40×(1+6.96%)/(11.25%-6.96%)

= $34.91