FIN361 HWPS for posting Sp 2018(2) Word Mailings ReviewView9 Tell me what you wa
ID: 1171172 • Letter: F
Question
FIN361 HWPS for posting Sp 2018(2) Word Mailings ReviewView9 Tell me what you want to do rences AaBbCcD AaBbCcI AaBbCcDc AaBbCcDc AaBbC Aab EE 1 Normal Body Text iTNo Spac TTable Pan. Heading 1 Head ay t A+ _ t-, T. ?. _ _ Paragraph Styles Problem 4 (3 points) Nannini Company (NC) recently paid a $1.25 dividend per share. The dividend of NC is expected to grow by 21 percent next year, 16 percent the following year and 11 percent the year after before growing at a constant rate of 6 percent growth that continues forever. NC's beta is 1.14, the risk-free rate of interest is 2.9 percent, and the market portfolio generates 12 25 percent rate of return What is the stock price of NC today?Explanation / Answer
Stock Price today is $ 20.78
Working:
As per Dividend discount model, price of stock is the present value of dividends .
a. Calculation of Required rate of return As per Capital Asset Pricing Model, Required return = Rf+beta*(Rm-Rf) Where, = 2.9%+1.14*(12.25%-2.9%) Rf 2.9% = 13.56% Beta 1.14 Rm 12.25% b. Present Value of 3 years dividend Year Dividend Discount factor @ 13.56% Present Value 1 $ 1.51 0.8806 $ 1.33 2 $ 1.75 0.7754 $ 1.36 3 $ 1.95 0.6828 $ 1.33 Present Value $ 4.02 Working: Year Previous Year dividend Growth Rate Current Year dividend 1 $ 1.25 21% $ 1.51 2 $ 1.51 16% $ 1.75 3 $ 1.75 11% $ 1.95 c. Terminal Value of dividend in Year 3 Terminal Value = D3*(1+g)/(ke-g) Where, = 1.75*(1+0.06)/(0.1356-0.06) D3 $ 1.75 = $ 24.54 g 6% Ke 13.56% d. Present Value of terminal Value = $ 24.54 x 0.6828 = $ 16.76 e. Present Value of all dividends = Present Value of 3 years dividend + Present Value of terminal value of dividend = $ 4.02 + $ 16.76 = $ 20.78Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.