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Financial Management Question: A company currently pays a dividend of $2per share(D0= $2).

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A company currently pays a dividend of $2per 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 at a constant rate of 7% thereafter. The company 's stock has a beta of1.2, 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 Summary

In this solution, we estimate a stock's current price given a set of data.

Solution Preview

To calculate this question, we need two formulas,

The Dividend Discount Model, which says that price = D0/(required return - growth rate), and

the CAPM, which says ...

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