Question 6 1 point Church Inc is presently enjoying relative

Question 6 (1 point) Church Inc. is presently enjoying relatively high growth because of a surge in the demand for its new product. Management expects earnings and dividends to grow at a rate of 22% for the next 4 years, after which competition will probably reduce the growth rate in earnings and dividends to zero, i.e., g 0. The company\'s last dividend, Do was S 1.25, its beta is l.20, the market risk premium is 5.50%, and the risk-free rate is 3.00%. What is the current price of the common stock? $26.57 $32.69 $28.97 $23.39 $27.37

Solution

Calculation of stock\'s current price: Year Amount PVF @9.6% Present value 1                       1.53 0.912                       1.39 2                       1.86 0.832                       1.55 3                       2.27 0.760                       1.72 4                       2.77 0.693                       1.92 4                     28.85 0.693                     19.99 Total                     26.57 So correct answer is $26.57 Working: Calculation of expected return: Expected return= risk free rate+ beta* market risk preium                                 = 3+1.2*5.5= 9.6% Calculation of dividend: Year 1= D0(1+growth)= 1.25*(1+0.22)=$1.53 Year 2= D0(1+growth)^2= 1.25*(1+0.22)^2=$1.86 Year 3= D0(1+growth)^3= 1.25*(1+0.22)^3= $2.27 Year 4= D0(1+growth)^4=1.25*(1+0.22)^4= $2.77 Terminal value= Dividend(1+growth)/(return-growth)                               =2.77(1+0)/(0.096-0)                              =2.77/0.096=$28.85