Giant Enterprises\' stock has a required return of 14.8%. The company, which pla

ID: 2776723 • Letter: G

Question

Giant Enterprises' stock has a required return of 14.8%. The company, which plans to pay a dividend of $2.60 per share in the coming year, anticipates that its future dividends will increase at an annual rate consistent with that experienced over the 1009-2015 period, when the following dividends were paid. Year Dividend per share 2015 $ 2.45 2014 2.28 2013 2.10 2012 1.95 2011 1.82 2010 1.80 2009 1.73 a. If the risk-free rate is 10%, what is the risk premium on Giant's stock? b. Using the constant-growth model, estimate the value of Giant's stock. c. Explain what effect, if any, a decrease in the risk premium would have on the value of Giant's stock. Giant Enterprises' stock has a required return of 14.8%. The company, which plans to pay a dividend of $2.60 per share in the coming year, anticipates that its future dividends will increase at an annual rate consistent with that experienced over the 1009-2015 period, when the following dividends were paid. Year Dividend per share 2015 $ 2.45 2014 2.28 2013 2.10 2012 1.95 2011 1.82 2010 1.80 2009 1.73 a. If the risk-free rate is 10%, what is the risk premium on Giant's stock? b. Using the constant-growth model, estimate the value of Giant's stock. c. Explain what effect, if any, a decrease in the risk premium would have on the value of Giant's stock.

Explanation / Answer

Calculation of risk premium on Giant's stock:

Required return

14.80%

Less: Risk free rate

10%

Risk premium

4.80%

Calculation of value of Giant's stock:

Calculation of Growth rate :

Dividend Year 2015

2.45

Dividend Year 2009

1.73

Growth rate = (2.45 / 1.73)^(1/6)-1

5.9709%

Value of the stock = Expected Dividend / (Required rate - Growth rate )

Value of the stock = (2.45 *105.9709%) / (14.80% - 5.9709% )

$ 29.41

Decrease in the risk premium will result in decrease in required rate and hence the price shall Increase.