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Use constant-growth model estimate value of giants stock

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Reference no: EM13212554

Giant Enterprises' stock has a required return of 14.8%. The company, which plans to pay a dividend of $2.60 per share in the coming year, anticipates that its future dividends will increase at an annual rate consistent with that experienced over the 2006-2012 period, when the following dividends were paid:

Year Dividend per share
2012 ......................$2.45
2011 ...................... 2.28
2010 ...................... 2.10
2009 ...................... 1.95
2008 ...................... 1.82
2007 ...................... 1.80
2006 ...................... 1.73

a. If the risk-free rate is 8%, what is the risk premium on Giant's stock?

b. Using the constant-growth model, estimate the value of Giant's stock.

c. Explain what effect, if any, a decrease in the risk premium would have on the value of Giant's stock.

Reference no: EM13212554

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