A company has yst paid a dividend of S 3 per share Do It is

A company has yst paid a dividend of S 3 per share. Do It is estimated that the company\'s dmdend will grow at a rate of 14 % percent per year for the next 2 years then the dividend will grow at a constant rate of 5 % thereafter The company\'s stock has a beta equal to l 4, the nisk-free rate is 4.5 percent, and the market risk premium two decimal places. Your Answer: is 4 percent What is your estimate of the stock\'s curent price?\' Round your ansnver to

Solution

Required return=Risk free rate+Beta*MArket risk premium

=4.5+(1.4*4)=10.1%

D1=(3*1.14)=$3.42

D2=(3.42*1.14)=$3.8988

Value after year 2=(D2*Growth rate)/(Required return-Growth rate)

=(3.8988*1.05)/(0.101-0.05)=$80.26941176

Hence current price=Future dividends*Present value of discounting factor(10.1%,time period)

=$3.42/1.101+$3.8988/1.101^2+$80.26941176/1.101^2

which is equal to

=$72.54(Approx).