8-11: Valuing Common Stocks with the Dividend Growth Model Problem 8-5 Nonconsta

Question

8-11: Valuing Common Stocks with the Dividend Growth Model

Problem 8-5 Nonconstant Growth Valuation

A company currently pays a dividend of $1.75 per share (D0 = $1.75). It is estimated that the company's dividend will grow at a rate of 22% per year for the next 2 years, and then at a constant rate of 8% thereafter. The company's stock has a beta of 1.35, the risk-free rate is 5.5%, and the market risk premium is 4%. What is your estimate of the stock's current price? Round your answer to the nearest cent.

Explanation / Answer

r = 5.5% + 1.35*4 = 10.9%

p = (1.75*1.22^1)/(1.109)^1 + (1.75*1.22^2)/(1.109)^2 + ((1.75*1.22^2*1.08)/(0.109-0.08))/(1.109)^2 =82.91

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