Consider the stock ABC. ABC is currently paying a dividend of $58. Given the riskiness of...

Transcribed Image Text:

Consider the stock ABC. ABC is currently paying a dividend of $58. Given the riskiness of ABC, you believe a fair discount rate is 8%. (a) What is the fair price of ABC if you expect dividends to grow at a constant rate of 5% in perpetuity? (b) After more careful analysis, you conclude that the growth rate is unlikely to stay 5% in perpetuity. Instead, you believe the growth rate will be 5% for the next 5 years and then 3% afterwards. What is the fair price of ABC in this case? You still believe discount rates are 8%. Consider the stock ABC. ABC is currently paying a dividend of $58. Given the riskiness of ABC, you believe a fair discount rate is 8%. (a) What is the fair price of ABC if you expect dividends to grow at a constant rate of 5% in perpetuity? (b) After more careful analysis, you conclude that the growth rate is unlikely to stay 5% in perpetuity. Instead, you believe the growth rate will be 5% for the next 5 years and then 3% afterwards. What is the fair price of ABC in this case? You still believe discount rates are 8%.

Answer rating: 100% (QA)

Lets calculate the fair price of ABC stock in both scenarios a Constant Growth Rate o... View the full answer