Urvashi Saini (Difference between Peak Performers & everyone else is what "everyone else" thinks) (1494 Points)
23 August 2013Hello frnds Plz solve this query which is based on constant growth valuation model.
ABC ltd's common stock is expected to pay a dividend of Rs 3 a share at the end of this year.
its beta is 0.8
the risk free rate is 5.2%
the market risk premium is 6%
dividend is expected to grow at some constant rate g,
and the stock currently sales for Rs 40 a share. assuming the market is in equilibrium what does the market believe will be the stock's price at the end of 3 year?
Aman
(Finance Professional)
(604 Points)
Replied 23 August 2013
Solution to your query-
Given in Ques
Current MP=40 (P0), RF=5.2%, Beta=0.8, Market Risk Premium (Market Rate of Return-Rf)=6%, Expected Dividend(D1)=3
First of all calculate Ke by CAPM modle
Ke=Rf+beta*Market risk premium
i.e, 0.052+0.8*.06=0.1 or 10%
now calculate Growth rate
Ke=D1/P0+g
.1=3/40+g, g=0.025 or 2.5%,
then calculate markt price at the end of 3 yrs
P1=P0(1+g)
40(1+.025) raise to the power 3
P1=43.07 mkt price at the end of 3 yrs....
i thnk it must be correct...
Urvashi Saini
(Difference between Peak Performers & everyone else is what "everyone else" thinks)
(1494 Points)
Replied 24 August 2013
CAclubindia
