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estimate of the stock's current price

A company currently pays a dividend of $2.00 per share, 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's 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?

Please show me how to find the answer and the rational for it.

Solution Preview

A company currently pays a dividend of $2.00 per share, 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's 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?

Step 1: To estimate the cost of equity:

Re = ...

Solution Summary

Find an estimate of the stock's current price.

$2.19