Question

The risk-free rate is 1.17% and the market risk premium is 7.37%. A stock with a β of 1.41 just paid a dividend of $1.19. The dividend is expected to grow at 20.65% for three years and then grow at 3.78% forever. What is the value of the stock?

Answer 1

The value of the stock is -$6.12, indicating that the stock is overvalued and not a good investment.

Step-by-step explanation:

Value of the Stock

To calculate the value of the stock, we can use the Dividend Discount Model (DDM) which takes into account the dividends paid by the stock. The formula for calculating the value of the stock is:

Value of the Stock = Dividend / (Risk-Free Rate - Dividend Growth Rate)

In this case, the dividend is $1.19 and the dividend growth rate is 20.65% for the first three years and 3.78% thereafter. The risk-free rate is 1.17%. Plugging in these values into the formula, we get:

Value of the Stock = $1.19 / (0.0117 - 0.2065)

Simplifying further, we get:

Value of the Stock = $1.19 / (-0.1948)

Value of the Stock = -$6.12

Since the value of the stock is negative, it indicates that the stock is overvalued and not a good investment.