Copyright

Schnusenberg Corporation just paid a dividend of $0.65 per share, and that dividend is expected...

Question:

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:


Answer:

Schnusenberg Corp's current stock price is $11.71.

Explanation:

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 =?

Computation:

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

Learn more about this topic:

Loading...
The Dividend Growth Model

from Finance 101: Principles of Finance

Chapter 14 / Lesson 3
9.7K

Related to this Question

Explore our homework questions and answers library