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Supernormal Growth Valuation

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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 percent per year for the next 2 years, then the dividend will grow at a constant rate of 7 percent thereafter. The company's stock had a beta equal to 1.2, the risk free rate is 7.5 percent, and the market risk premium is 4 percent.

What would you estimate is the stock's current price?

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Solution Preview

The current price of the stock is the present value of all dividends. In this case we have to use the two stage model. In the first stage the dividends grow at 20% and then at 7% when the constant ...

Solution Summary

The solution explains how to determine the current price of stock under supernormal growth valuation