Problem 6-22 Suppose the dividends for the Seger Corporation over the past six y
ID: 2638375 • Letter: P
Question
Problem 6-22
Suppose the dividends for the Seger Corporation over the past six years were $2.54, $2.62, $2.71, $2.79, $2.89, and $2.94, respectively. Compute the expected share price at the end of 2014 using the perpetual growth method. Assume the market risk premium is 10.5 percent, Treasury bills yield 5.6 percent, and the projected beta of the firm is .92. (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "$" sign in your response.)
Suppose the dividends for the Seger Corporation over the past six years were $2.54, $2.62, $2.71, $2.79, $2.89, and $2.94, respectively. Compute the expected share price at the end of 2014 using the perpetual growth method. Assume the market risk premium is 10.5 percent, Treasury bills yield 5.6 percent, and the projected beta of the firm is .92. (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "$" sign in your response.)
Explanation / Answer
As per the given data
cost of Equity = Risk free return + Beta*risk Premium
= 5.6% + .92*10.5% = 15.26%
Now we have to find out the dividend growth rate
2.94=2.54*(1+g)^6 here g= dividend growth rate
(1+g)^6 = 1.1575=1.0247^6
so g=2.47%
So Stock price in the end of 2014=2.94*1.0247/(.1526-.0247)
=$23.55