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

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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 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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