Nonconstant Growth Valuation A company currently pays a dividend of $2

Finance Oct 06, 2020

Nonconstant Growth Valuation

A company currently pays a dividend of $2.6 per share (D0 = $2.6). It is estimated that the company's dividend will grow at a rate of 16% per year for the next 2 years, and then at a constant rate of 7% thereafter. The company's stock has a beta of 1.5, the risk-free rate is 6.5%, and the market risk premium is 3%. What is your estimate of the stock's current price? Do not round intermediate calculations. Round your answer to the nearest cent.

Expert Solution

Computation of Required Rate of Return:

Required Rate of Return = Risk-free Rate + Beta*Market Risk Premium

= 6.5%+1.5*3%

= 6.5% + 4.5%

Required Rate of Return = 11%

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