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Question 1: A company currently pays a dividend of $4 per share (D0 = $4). 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 5% thereafter. The company's stock has a beta of 1.5, the risk-free rate is 7.5%, and the market risk premium is 4%. What is your estimate of the stock's current price? Do not round intermediate calculations. Round your answer to the nearest cent.
Risk free rate + Beta x market premium
= 7.5 +(1.5 x 2) =7.5 x 3 = 10.5%
D1 = (4 x 1.24) =4.96
D2 = (4.96 x 1.24) = 6.1504
Value after year 2 = (D2 x Growth rate) / required return - Growth rate
= (6.1504 x 1.05) / 0.105 - 0.05)
= 6.45792 / 0.055
= 117.416727
FV x PV discounting factor (rate %, time period)
4.96 / 1.0105 + 6.1504 / 1.0105^2 + 117.416727 / 1.0105^2
= 125.92
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