Final answer:
The value of the stock is calculated using the Dividend Discount Model for the initial growth period and the Gordon Growth Model for the constant growth phase. CAPM is used to determine the required rate of return, taking into account the stock's beta in the calculation. The process involves discounting projected dividends and terminal value to present value.
Step-by-step explanation:
The value of the stock considering the dividend growth and risk associated with the market can be calculated using the Dividend Discount Model (DDM) for the first five years of expected high growth and then applying the Gordon Growth Model (GGM) for the terminal growth rate. We also account for the stock's beta (β), which measures its volatility relative to the market, to calculate the required rate of return using the Capital Asset Pricing Model (CAPM).
First, we need to calculate the expected rate of return using CAPM:
Required Rate of Return = Risk-free Rate + (β x Market Risk Premium)
Then we use DDM to find the present value of the dividends during the high growth phase and GGM to find the present value of the stock after five years, which includes the constant growth phase into perpetuity.
The calculation is more complex and involves several steps, including projecting the dividends for the initial high growth period, discounting them to present value using the required rate of return, calculating the terminal value of the stock using the Gordon Growth Model at the end of the high growth period, and then discounting that back to present value. These values are then summed to get the total value of the stock.