Reference no: EM132553914

Vincent Nguyen, an analyst, is examining the stock of British Airways (London Stock Exchange: BAY) as of the beginning of 2008. He notices that the consensus fore­cast by analysts is that the stock will pay a £4 dividend per share in 2009 (based on 21 analysts) and a £5 dividend in 2010 (based on 10 analysts). Nguyen expects the price of the stock at the end of 2010 to be £250. He has estimated that the required rate of return on the stock is 11 percent. Assume all dividends are paid at the end of the year.

Question 1: Using the DDM, estimate the value of BAY stock at the end of 2009. Using the DDM, estimate the value of BAY stock at the end of 2008.

Maspeth Robotics shares are currently selling for €24 and have paid a dividend of €1 per share for the most recent year. The following additional information is given:

The risk-free rate is 4 percent;

The shares have an estimated beta of 1.2; and

The equity risk premium is estimated at 5 percent.

Question 2: Based on the above information, determine the constant dividend growth rate that would be required to justify the market price of €24.