Question

DMH Enterprise�s stock dividends are expected to grow at a rate of 25% for three years, after which dividends are expected to grow at a constant rate of 10% forever. The company recently paid a dividend of $2 and the required rate of return on the stock is 12%, what is the stock�s current price?

	$115.41
	$128.54
	$144.15
	$160.54

You are charged with the valuation of Hurst Company�s stock. You have access to the following information: Hurst dividends are expected to grow at a rate of 10% for the next three years, after which growth will taper to a constant rate of 5%. Hurst�s beta is 1.5, the current yield on Treasury bills is 3% and the return on the market is 7%. If Hurst Company is expected to pay a dividend of $2.25 at the end of the year, what is the stock�s current price?

	$57.09
	$61.66
	$62.69
	$67.71

Answer 1

Stock price is equal to the present value of all future dividends

= 2(1.25)/(1.12) + 2(1.25)^2/(1.12)^2 + 2(1.25)^3/(1.12)^3 + 2(1.25)^3(1.10)/(1.12)^3(12%-10%)

= $160.43

i.e. $160.54 approx.

Required return as per CAPM = Risk free rate + beta*(Market return – risk free rate)

= 3% + 1.5*(7%-3%)

= 9%

Value of stock = 2.25/(1.09)+2.25(1.10)/(1.09)^2 + 2.25(1.10)^2/(1.09)^3 + 2.25(1.10)^2(1.05)/(1.109)^3(9%-5%)

= $61.43

i.e. $61.66 approx.