Question

The risk-free rate is 3.53% and the market risk premium is 7.08%. A stock with a β of 1.51 just paid a dividend of $2.75. The dividend is expected to grow at 21.56% for three years and then grow at 4.76% forever. What is the value of the stock?

Answer 1

The value of the stock is approximately $25.95.

Step-by-step explanation:

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

Stock Value = Div1 / (r - g)

Where Div1 is the dividend expected to be paid in Year 1, r is the required rate of return (risk-free rate + market risk premium), and g is the expected growth rate of dividends.

In this case, the dividend in Year 1 is $2.75, the risk-free rate is 3.53%, the market risk premium is 7.08%, and the expected growth rates are 21.56% for the first three years and 4.76% thereafter. Plug in these values:

Stock Value = $2.75 / (0.0353 + 0.0708) - (0.2156) + (0.0476)

Simplifying the equation, we find:

Stock Value = $2.75 / 0.1059

Stock Value ≈ $25.95