Juvani has a beta of 1.50, the
Juvani has a beta of 1.50, the risk-free rate of interest iscurrently 12 percent, and the required return on the marketportfolio is 18 percent. The company plans to pay a dividend of$2.45 per share in the coming year and anticipates that its futuredividends will increase at an annual rate as follow; D2017= 2,32,D2016= 2.12, D2015=2.30. what is the price of Juvani stock
Please Solve As soon asSolve quickly I get you two UPVOTE directlyThank’sAbdul-Rahim Taysir
Answer:
First we should calculate the cost of equity from Capital AssetPricing model
Cost of equity= (Risk-free rate)+(beta*(Required return on themarket-risk-free rate))
= 0.12+(1.5*(0.18-0.12))=0.21=21%
Dividend at the end of 2014 is $2.45. Discounted Valueof dividend to be received in 2014 year end is 2.0248
Dividend for 2015= (2.45*1.023)= $2.51 (ronding off to 2 decimalpoints). Discounted Value of dividend to be received in2015 year end is $1.7144
Dividend for 2016=(2.51*1.0212)=$2.56. Discounted Valueof dividend to be received in 2016 year end is $1.4450
Dividend for 2017= (2.56*1.0232)=$2.62
Terminal value calculation for Dividend after end of 2017 willbe calculated as follows with an assumption of post 2017 thedividends would grow at 2.32%
Terminal value of Dividends is((2.62*1.0232)/(0.21-0.0232)=(2.62*1.0232)/0.1868=$14.35
This terminal value is the present value of all the futuredividends post 2017.So dividends at the end of 2017 is
$14.35+$2.62=$16.97
Discounted Value of terminal value to be received in2017 year end is $7.9166
So Present Value of the stock is sum of discounted value of theabove items which is
= $13.1008
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