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30 September, 12:54

1) A stock pays a dividend of $10 per share. It has a cost of capital, K of 8%. It has a constant growth rate of 3%. Use the Constant Dividend Growth model to calculate it's current price. 2) A stock. is about to go public and listed on the Nasdaq. Using the following information calculate it's stock price. a. A comparable stock has a beta of 1.5. b. The current risk free rate is 2% and the return on the Nasdaq is 8%. c. The company's Free Cash flowis going to grow at 30% per year for the next three years. d. The long term growth rate after three years will be 5%. e. It pays a dividend of 20% of Free Cash Flows at the moment. The current free cash flow for the company is $ 10 per share.

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  1. 30 September, 13:29
    0
    answer is A) $206 B) $61.31

    Explanation:

    to calculate price of the stock at zero we use dividend discount model formula

    P0 = D (1+G) / (r-g)

    10 (1.03) / (0.08-0.03)

    $206

    b) The dividend is said to be 2% of the free cash flow therefore can be calculated as $10*0.2=$2 per share

    then calculate divide growth rates

    D1=2*1.3 = 2.6

    D2=2 * (1.3) (1.3) = 3.38

    D3 = 2 * (1.3) (1.3) (1.3) = 4.394

    Claculate the discount rate using CAPM according to given information

    R = 0.2 + 1.5 (0.08-0.02)

    = 0.11/11%

    Use the dividend discount model to calculate the price of the stock

    P0 = 2.6/1.11+3.38/1.3²+4.394 * (1.05) / (0.11-0.05)

    2.342+2.743+56.225

    =$61.31
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Home » Business » 1) A stock pays a dividend of $10 per share. It has a cost of capital, K of 8%. It has a constant growth rate of 3%. Use the Constant Dividend Growth model to calculate it's current price. 2) A stock. is about to go public and listed on the Nasdaq.
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