The stock of TheyWork pays an uncertain dividend at the end of each calendar year. It is the 1st of
The stock of TheyWork pays an uncertain dividend at the end of each calendar year. It is the 1st of January and the company has just paid a $12 dividend. The price dividend ratio of TheyWork is 20.37. Expected dividends of the company grow at the rate of 10% per year.
(a) According to the Gordon Growth Formula, what must be the discount rate r of They- Work?
(b) The risk-free rate is 1% and the market risk premium is 6%. Suppose the CAPM holds, what must be the β of TheyWork?
(c) It is still the 1st of January and you learn that after this year's dividend is paid out in December, the growth rate of TheyWork expected dividends going forward will be g = 0%. What is the new price of TheyWork stock? HINT: draw a timeline.