Using the following information on Bear Corporation and the dividend discount model, calculate the value of Bear Corporation's stock

Business Sep 12, 2020

Using the following information on Bear Corporation and the dividend discount model, calculate the value of Bear Corporation's stock.

Growth: 12% ROE: 15%
Earnings Per Share Last Year: $10.00 Beta: 1.50
Risk Free Rate: 5.00% Market Risk Premium: 6.00%

Expert Solution

By CAPM, the firm's required return rate is
R = Rf + Beta * Risk Premium = 5% + 1.5*6% = 14%

The firm's Dividend last year is D = EPS*ROE = 10*15% = 1.5
By DDM, the value of Bear Corporation's stock is
P = D(1+g) / (R-g) = 1.5*(1+12%)/(14% - 12%) = $84

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