Question

Suppose the dividends for the Seger Corporation over the past six years were $1.42, $1.50, $1.59, $1.67, $1.77, and $1.82, respectively. Assume that the historical average growth rate will remain the same for 2020. Compute the expected share price at the end of 2020 using the perpetual growth method. Assume the market risk premium is 13.5 percent, Treasury bills yield 4.5 percent, and the projected beta of the firm is .75.

Answer 1

Answer:

$20.05

Explanation:

Calculating the required rate using CAMP Model

Required rate = Risk free rate + Beta*Market risk premium

Required rate = 4.5% + 0.75*13.5%

Required rate = 4.5% + 10.13%

Required rate = 14.63%

Calculating the growth rate using Future value method

Future value = Present value * (1+r)^n

r = $n\sqrt{Future value/Present value }$ - 1

r = $5\sqrt{ 1.82/ 1.42}$ - 1

r = 1.05088842546 - 1

r = 0.05089

r = 5.09%

Stock price = Last year dividend * (1 + Growth rate) / (Required rate - Growth rate)

Stock price = $1.82 * (1+0.05089) / (0.1463-0.05089)

Stock price = $1.82*1.05089 / 0.09541

Stock price = $1.9126198 / 0.09541

Stock price = $20.04632428466618

Stock price = $20.05

So, the expected share price at the end of 2020 using the perpetual growth method is $20.05.