A company currently pays a dividend of $4 per share (D0 = $4)

Finance Aug 09, 2020

A company currently pays a dividend of $4 per share (D0 = $4). It is estimated that the company's dividend will grow at a rate of 24% per year for the next 2 years, and then at a constant rate of 7% thereafter. The company's stock has a beta of 1.8, the risk-free rate is 10%, and the market risk premium is 5.5%. What is your estimate of the stock's current price

Expert Solution

Current stock price = $43.90

Working notes:-

Required return = Risk free rate + (Beta * Market risk premium)

= 10% + (1.8 * 5.5%)

= 10% + 9.90%

= 19.90%

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