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Calculating Stock Price

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1.) Brown incorporated is expected to pay a 41.50 per share dividend at the end of the year (i.e., D1= $1.50). The dividend is expected to gross at a constant rate of 7% a year. The required rate of return on the stock r, is 15%. What is the value per share of the company's stock?

2.) 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, and 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 stocks current price?

3.) You are considering an investment in the common stock of Captain cookware. The stock is expected to pay a dividend of $2 a share at the end of the year (D1= $2.00). The stock has a beta equal to 0.9. The risk-free rate is 5.6%, and the market risk premium is 6%. The stock's dividend is expected to grow at some constant rate g. The stock currently sells for $25 a share. Assuming the market is in equilibrium, what does the market believe will be the stock price at the end of 3 years?

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Solution Summary

There are three problems. Solutions to these problems expain the methodology to estimate price of a stock based upon constant growth, uneven growth models.

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Solution 1

D1=$1.50
g=7%
rs=15%

Price of stock=D1/(rs-g)=1.50/(0.15-0.07)= $18.75

Solution 2

Do=$2
Dividend in year 1=D1=2*1.2=$2.4
Dividend in year 2=D2=2.4*1.2=$2.88
Dividend in year 3=D3=2.88*1.07=$3.0816

Beta=1.2
Risk free rate=7.5%
Market risk premium=4%

Required rate of ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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