A colleague that is a regular on investing message boards recently commented that SunDoe Coffee stock will start paying dividends in the near future because of all of the cash flow that it generates. In reviewing the stock, she made a bold forecast that SunDoe will start paying its first dividend 3 years from now in the amount of $5 per share, after which the growth rate would be a constant rate of 3%, forever. SunDoe has a debt-to-equity ratio (D/E) of 1 (equally financed with debt and equity), the annual YTM on the company's long-term bonds averages 8% and the company's tax rate is projected to be 30% in the future. If the risk-free rate is 4%, the market risk premium is 6% and SunDoe's Beta is 2.0, what should the stock sell for today based on a discounted valuation of the future dividends that your colleague projected. Calculate the stock  price.

Answer rating: 100% (QA)

Answer Calculating SunDoe Coffees Stock Price based on Discounted Dividends We can use the Dividend Discount Model DDM with Constant Growth to estimat... View the full answer