Question

The risk-free rate is 3.24% and the market risk premium is 9.79%. A stock with a β of 0.85 just paid a dividend of $1.07. The dividend is expected to grow at 20.67% for three years and then grow at 4.92% forever. What is the value of the stock?

Answer 1

To calculate the value of the stock, use the dividend discount model (DDM) formula and the given information.

Step-by-step explanation:

To calculate the value of the stock, we can use the dividend discount model (DDM). The DDM formula is:

Stock Value = (Dividend / (Risk-Free Rate - Growth Rate)) * (1 - Beta)

Using the given information, the dividend for the first three years is $1.07 and it is expected to grow at 20.67%. After three years, the dividend growth rate is expected to be 4.92%. The risk-free rate is 3.24% and the market risk premium is 9.79%. The stock's beta is 0.85.

Using the DDM formula with these values, we can calculate the value of the stock.