Question: A stock pays $2 now and the dividend grow at 90% for 1 year. Then it g

Question

Question:

A stock pays $2 now and the dividend grow at 90% for 1 year. Then it grows at 20% for 2 years. Finally, it grows at 2% perpetually. If the default free rate is 4%, the bheta is 2, and the market premium is 3%, calculate the price.

This problem was solved already, but today, my professor added new information, which was that the the bheta is 2. I would really appreciate if you can please show your work (step by step). The more work that you show, it will help me to understand how to approach the problem more better. I need to answer this question for a take home assignment, so any help would mean a lot to me. Thanks in advance.

Explanation / Answer

Required rate of return = Default free rate + beta * Market risk premium

= 4% + 2 * 3%

= 10%

Stock price = $2 * (1+90%) / (1+10%) + $2 * (1+90%) * (1+20%) / (1+10%)2 + $2 * (1+90%) * (1+20%)2 / (1+10%)3 + $2 * (1+90%) * (1+20%)2 * (1+2%) / [(1+10%)2 * (10%-2%)]

= $68.99 ~ $69

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