Question

A company currently pays a dividend of $2.6 per share (d0 = $2.6). it is estimated that the company's dividend will grow at a rate of 24% per year for the next 2 years, and then at a constant rate of 8% thereafter. the company's stock has a beta of 1.8, the risk-free rate is 7.5%, and the market risk premium is 4.5%. what is your estimate of the stock's current price?

Answer 1

The current value of the stock is $53.413455.

What is the CAMP model?

• The CAMP model describes the relationship between systemic risk, or the general dangers of investing, and projected return on assets, specifically stocks.

To find the current price of stock:

Stock’s current price: 53.41 dollars

First, we determine the stock's value using the CAPM model.

• Ke = rf + (rm - rf)
• risk free, rf =  0.085.
• premium market = (rm - rf) = 0.045
• (nondiversifiable risk) = 1.3

Then, Ke = 0.085 + 1.3(0.045).

• Ke = 0.14350

The current value of the future dividends must now be known:

• D0 = 2.8
• D1 = D0 x (1 + g) = 2.8 * 1.23 = 3.444
• D2 =  3.444 x 1.23 = 4.2361200

The next dividends, which are at perpetuity will be solved using the dividend growth model:

• dividends/return-growth = Intrinsic value

In this case, dividends will be:

• 4.23612 x 1.07 = 4.5326484

Return will be calculated using the CAPM and g = 7%.

plug this into the Dividend grow model,

• 4.53264840.1435-0.07 = Intrinsic Value

• Value of the dividends at perpetuity: 61.6686857

Finally, it's crucial to remember that these statistics were calculated for the present year.

We must bring them to the present day using the present value of a lump sum:

• principal/(1 + rate)time = PV
• 3.444/(1 + 0.1435)1 = PV
• 3.011805859 = PV
• 4.23612/(1 + 0.1435)2 = PV
• 3.239633762 = PV
• 61.6686857/(1 + 0.1435)2 = PV
• 47.16201531 = PV

We add them and get the value of the stock, 53.413455

Therefore, the current value of the stock is $53.413455.

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