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 28% 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 5.00%. The company’s last dividend was $0.85, its beta is 1.25, the market risk premium is 7.00%, and the risk-free rate is 6.50%. What is the current price of the common stock?

Explanation / Answer

cost of equity or r=6.50%+1.25*7.00%=15.25%

What is the current price of the common stock

=(0.85*(1+28%)^1)/(1+15.25%)^1+(0.85*(1+28%)^2)/(1+15.25%)^2+(0.85*(1+28%)^2*(1+21.90%)^1)/(1+15.25%)^3+(0.85*(1+28%)^2*(1+21.90%)^2)/(1+15.25%)^4+((0.85*(1+28%)^2*(1+21.90%)^2*(1+5%))/(15.25%-5%))/(1+15.25%)^4

=16.29

the above is answer..

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