Stewart Industries just paid a $3.00 per share dividend on its common stock yest

Question

Stewart Industries just paid a $3.00 per share dividend on its common stock yesterday (i.e., D0 = $3.00). The dividend is expected to grow 20 percent a year for the next four years, after which time the dividend is expected to grow at a constant rate of 5 percent a year for ever. The stock’s beta is 1.5, the risk-free rate of interest is 2 percent, and the rate of return on the market portfolio is 10 percent. What is the price of the stock at the end of year 4? What should be the stock price today?

Explanation / Answer

first calculate the required rate od return ons tock

= 2% + 1.5*(10%-2%)

=14%

For the stream of dividend that increases at 5%

Dividend in year 5 =6.53

D1/(r-g)

=6.53/(.12-.05)

=6.53/.07

=93.312

Then the present value is equal to =93.31/(1.12)^4= 59.30

Total value of the stock is = 59.30 +14.30 =73.60

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.