Answered

Welcome to Westonci.ca, your one-stop destination for finding answers to all your questions. Join our expert community now! Connect with a community of experts ready to help you find solutions to your questions quickly and accurately. Experience the convenience of finding accurate answers to your questions from knowledgeable experts on our platform.

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?

Sagot :

The stock's current price  is  53.413455.

What is CAPM ?

  • The capital asset pricing model (CAPM) is an idealized portrayal of how financial markets price securities and thereby determine expected returns on capital investments.
  • The model provides a methodology for quantifying risk and translating that risk into estimates of expected return on equity.

The capital asset pricing model (CAPM) to know the value of the stock

[tex]Ke = rf + \beta ( r_{m} - r_{f} )[/tex]

risk free = 0.085

premium market =(market rate - risk free) = 0.045

beta(non diversifiable risk) 1.3

Ke = 0.085 + 1.3(0.045)

Ke = 0.14350

Now we need to know the present value of the future dividends:

D0 = 2.8

D1 = D0 × ( 1 +g ) = 2.8  = 2.8 * 1.23 = 3.444

D2 3.444 x 1.23 = 4.2361200

The next dividends, which are at perpetuity will we solve using the dividned grow model

[tex]\frac{divends}{return - growth} = Intrinsic value[/tex]

In this case dividends will be:

4.23612 x 1.07 = 4.5326484

return will be how return given by CAPM and g = 7%

plug this into the Dividend grow model.

[tex]\frac{4.5326484}{0.1435 - 0.07} = Intrinsic value[/tex]

value of the dividends at perpetity: 61.6686857

Finally is important to note this values are calculate in their current year. We must bring them to present day using the present value of a lump sum:

[tex]\frac{principal}{(1 + rate)^{time} } = PV[/tex]

[tex]\frac{3.444}{(1 + 1. 1435)^{1} } =PV[/tex]

3.011805859

[tex]\frac{4.23612}{( 1 + 0.1435)^{2} } = PV[/tex]

3.239633762

[tex]\frac{61.6686857}{(1 + 0.1435)^{2} } = PV[/tex]

47.16201531

We add them and get the value of the stock  is 53.413455.

Learn more about CAPM

brainly.com/question/17154996

#SPJ4

We hope this was helpful. Please come back whenever you need more information or answers to your queries. We hope you found this helpful. Feel free to come back anytime for more accurate answers and updated information. Discover more at Westonci.ca. Return for the latest expert answers and updates on various topics.