Acompany currently pays a dividend of $2.8 per share (d0 = $2.8). it is estimated that the company's dividend will grow at a rate of 23% per year for the next 2 years, and then at a constant rate of 7% thereafter. the company's stock has a beta of 1.3, the risk-free rate is 8.5%, and the market risk premium is 4.5%. what is your estimate of the stock's current price? do not round intermediate calculations. round your answer to the nearest cent.

Intrinsic value: 53.41 dollars

Explanation:

First, we use the CAPM model to know the value of the stock

risk free0.085

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

beta(non diversifiable risk)1.3

Ke0.14350

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

D0 = 2.8

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

D23.444 x 1.23 = 4.2361200

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

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.

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:

3.011805859

3.239633762

47.16201531

We add them and get the value of the stock:

53.413455

answer; dividing net income by 1- t ;

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