Problem 7-05 Nonconstant Growth Valuation A company currently pays a dividend of $1.25 per share (D0 = $1.25)....

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Finance

Problem 7-05
Nonconstant Growth Valuation
A company currently pays a dividend of $1.25 per share(D₀ = $1.25). It is estimated that the company'sdividend 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 stockhas a beta of 1.4, the risk-free rate is 4%, and the market riskpremium is 4%. What is your estimate of the stock's current price?Do not round intermediate calculations. Round your answer to thenearest cent.
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Step1 Calculation of the Required Rate of Return Ke As per CAPM Approach the Required Rate of Return is calculated as follows Required Rate of Return Riskfree Rate Beta x Market Risk Premium 400 14 x 400 400 560 960 Step2 See Answer

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Problem 7-05Nonconstant Growth ValuationA company currently pays a dividend of $1.25 per share(D0 = $1.25). It is estimated that the company'sdividend will grow at a rate of 22% per year for the next 2 years,and then at a constant rate of 8% thereafter. The company's stockhas a beta of 1.4, the risk-free rate is 4%, and the market riskpremium is 4%. What is your estimate of the stock's current price?Do not round intermediate calculations. Round your answer to thenearest cent.$