Everest Inc. is presently enjoying relatively high growth because of a surge in

Question

Everest Inc. is presently enjoying relatively high growth because of a surge in the demand for its new product. Management expects earnings and dividends to grow at a rate of 30% for the next 2 years, 21.90% in year 3 and 4 and after which competition will probably reduce the growth rate in earnings and dividends to constant growth rate of 7.00%. The company’s last dividend was $1.60, its beta is 1.75, the market risk premium is 9.55%, and the risk-free rate is 6.00%. What is the current price of the common stock? Round your answer to two decimal places. For example, if your answer is $345.6671 round as 345.67 and if your answer is .05718 or 5.7182% round as 5.72. $23.89 $14.91 $20.83 $18.92 $19.11

Explanation / Answer

Last Dividend, D0 = $1.600

Growth rate for next 2 years is 30%, 21.90% in year 3 and year 4, followed by constant growth rate (g) of 7.0%

D1 = $1.600 * 1.3000 = $2.080
D2 = $2.080 * 1.3000 = $2.704
D3 = $2.704 * 1.2190 = $3.296
D4 = $3.296 * 1.2190 = $4.018
D5 = $4.018 * 1.0700 = $4.299

Required Rate of Return, r = Risk-free Rate + beta * Market Risk Premium
Required Rate of Return, r = 6.00% + 1.75 * 9.55%
Required Rate of Return, r = 22.7125%

P4 = D5 / (r - g)
P4 = $4.299 / (0.227125 - 0.07)
P4 = $27.36

P0 = $2.08/1.227125 + $2.704/1.227125^2 + $3.296/1.227125^3 + $4.018/1.227125^4 + $27.36/1.227125^4
P0 = $19.11

So, current price of the common stock is $19.11

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