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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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3.6 Ratings (561 Votes)
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 = $1.25). It is estimated that the company'sdividend will grow at a rate of 22% per year for the next 2 years,and then at a constant rate of 8% thereafter. The company's stockhas a beta of 1.4, the risk-free rate is 4%, and the market riskpremium is 4%. What is your estimate of the stock's current price?Do not round intermediate calculations. Round your answer to thenearest cent.$

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