A stock that currently trades for $40 per share is expected to pay a year-end dividend of $2 per share. The dividend is expected to grow at a constant rate over time. The stock has a beta of 1.2, the risk-free rate is 5%, and the market risk premium is 5%. What is the stock’s expected price seven years from today?
November 23rd, 2009 at 7:16 am
Ks=risk free rate+ beta * market premium= 0.05+1.2*0.05=0.11
dividend constrant growth
Price or present value P= 40
D1=2 $ per share.
P0=D1/(1+g) , g = constant growth
g=-0.05(means declining)
Price at year 7=Price at year 0*(1+g)power 7
=40*(0.95)pwer 7
= 27.93349
I hope it is correct