Answer:
P0 = $5.99394080634 rounded off to $5.99
Step-by-step explanation:
The dividend discount model (DDM) can be used to calculate the price of the stock today. DDM calculates the price of a stock based on the present value of the expected future dividends from the stock. The formula for price today under DDM is,
P0 = D1 / (1+r) + D2 / (1+r)^2 + ... + Dn / (1+r)^n + [(Dn * (1+g) / (r - g)) / (1+r)^n]
Where,
- D1, D2, ... , Dn is the dividend expected in Year 1,2 and so on
- g is the constant growth rate in dividends
- r is the discount rate or required rate of return
We first need to calculate the levered beta of Valverde.
Levered Beta = Unlevered Beta * [1+ (1-tax rate) * (Debt/Equity)]
Levered Beta = 1 * [(1 + (1 - 0.3) * (75/25)]
Levered Beta = 3.1
We first need to calculate the cost of equity (r) using the CAPM equation. The equation is,
r = risk free rate + Levered Beta * (Expected return on Market - risk free rate)
We know that the risk free rate is 0.04 or 4%, the beta is 3.1 and the expected return on market is 0.1 or 10%.
r = 0.04 + 3.1 * (0.1 - 0.04)
r = 0.226 or 22.6%
Now, using the DDM equation, the price of stock will be,
P0 = 1 * (1+0.12) / (1+0.226) + 1 * (1+0.12) * (1+0.09) / (1+0.226)^2 +
[(1 * (1+0.12) * (1+0.09) * (1+0.03) / (0.226 - 0.03)) / (1+0.226)^2]
P0 = $5.99394080634 rounded off to $5.99
P0 = $99.2830 rounded off to $99.28