Question

R. E. Lee recently took his company public through an initial public offering. He is expanding the business quickly to take advantage of an otherwise unexploited market. Growth for his company is expected to be 40 percent for the first three years and then he expects it to slow down to a constant 15 percent. The most recent dividend was $0.75. Based on the most recent returns, the beta for his company is approximately 1.5. The risk-free rate is 8 percent and the market risk premium is 6 percent. What is the current price of Lee's stock

Answer 1

Answer: $77.13

Explanation:

Based on the information given in the question, the current price of Lee's stock will be calculated thus:

First, the required rate of return will be:

= 8% + (1.5 × 6%) = 8% + 9% = 17%

Year 1:

Cash flow: 1.05

Present value: 0.90

Year 2:

Cash flow: 1.47

Present value: 1.07

Year 3:

Cash flow: 2.06

Present value: 1.28

Year 4:

Cash flow: 118.34

Present value: 73.88

The current price of Lee's stock will be:

= 0.90 + 1.07 + 1.28 + 73.88

= 77.13

The current price of Lee's stock is $77.13.