The ABC Company paid a dividend of 4.25 per share. Analysts expect the dividends to grow at the rate of 18% per year for 2 years, and then drop to 15% for 1 year, before finally converging to the industry median growth rate of 8% per year. Treasury bills are currently yielding 4%, the stock's beta is estimated to be 1.3 and the market is expected to have a rate of return of 9% over the next year. How much money should the stock be selling for? If using an excel sheet please include formulas/calculations to each.
Expected return = risk free rate + beta * market risk premium
= 4% + 1.3 * (9% - 4%)
= 10.5%
value of stock = Present value of dividends + Horizontal value
Horizontal value = dividend next year/(Required return - growth rate)
= 4.25*1.18^2*1.15*1.08/(0.105-0.08)
= 293.991336
value of stock
= 4.25*1.18/1.105 + 4.25*1.18^2/1.105^2 + 4.25*1.18^2*1.15/1.105^3 + 293.991336/1.105^3
= 232.32
The ABC Company paid a dividend of 4.25 per share. Analysts expect the dividends to grow...
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