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    Estimating current price of a stock

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    A company currently pays a dividend of $2 per share, D0 = $2. It is estimated that the company's dividend will grow at a rate of 20% per year for the next 2 years, then the dividend will grow at a constant rate of 7% thereafter. The company' stock has a beta equal to 1.2 the risk-free rate is 7.5%, and the market risk premium is 4%. What is your estimate of the stock's current price?

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    Solution Preview

    Dividend at the end of Year 1, D1=D0*(1+growth rate)=2*(1+20%)=$2.40
    Dividend at the end of Year 2, D2=D1*(1+growth rate)=2.40*1.20=2.88
    Dividend at the end of Year 3, D3=D2*(1+growth ...

    Solution Summary

    Solution describes the steps to estimate the current price of given stock.