Schnusenberg Corporation just paid a dividend of $0.65 per share, and that dividend is expected to grow at a constant rate of 7.00% per year in the future. The company's beta is 1.45, the required return on the market is 10.50%, and the risk-free rate is 5.00%. What is the company's current stock price?
Dividend Growth Model:
The dividend growth model is a stock valuation model that determines the current stock price of a given stock by considering its future dividends, its growth rate and the required return expected on the stock. The present value of the future dividends assumed to grow at a constant rate, discounted using a discounting rate is the current stock price as per the model.
Answer and Explanation:
Schnusenberg Corp's current stock price is $11.71.
As per the data provided by Schnusenberg Corp:
- Last dividend, D0 = $0.65 per share
- Constant growth rate, g = 7%
- Beta = 1.45
- Required market return. Rm = 10.5%
- Risk-free return, Rf= 5%
- Required return, r =?
- Current stock price, P0 =?
The first step is to determine the required return using CAPM:
- r = Rf + Beta * (Rm - Rf)
- r = 5% + 1.45 * (10.5% - 5%)
- r = 12.98%
The second step is to determine the current stock price using DDM:
- P0 = D1 / (r - g)
- P0 = $0.65 * (1 + 7%) / (12.98% - 7%)
- P0 = $0.70 / 5.98%
- P0 = $11.71
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from Finance 101: Principles of FinanceChapter 14 / Lesson 3