You are required to evaluate 2 Italian stocks using the dividend valuation model.Stock A paid a dividend of 3£ and its dividends are expected to grow at a rate of 2% a year for 2 years. Then dividends will remain constant thereafter. Stock B made a return of 10% per year on its equity and this ROE is expected to be main tailed for the future. The dividend pay out ratio is 50% . Last year earnings per share was £2. The betas of stocks A and B are 0.5 and 1.5 . The market risk premium is 8%. The Italian government bonds yield 6%. The bonds are rated A1 by Moody and have a default spread of 3%.

Estimate the stock price of both stocks using the dividend valuation model.

Answer rating: 100% (QA)

To estimate the stock prices of Stock A and Stock B using the dividend valuation model we need to ca... View the full answer