1) A stock pays a dividend of $10 per share. It has a cost of capital, K of 8%. It has a constant growth rate of 3%. Use the Constant Dividend Growth model to calculate it’s current price. 2) A stock . is about to go public and listed on the Nasdaq. Using the following information calculate it’s stock price. a. A comparable stock has a beta of 1.5. b. The current risk free rate is 2% and the return on the Nasdaq is 8%. c. The company’s Free Cash flowis going to grow at 30% per year for the next three years. d. The long term growth rate after three years will be 5%. e. It pays a dividend of 20% of Free Cash Flows at the moment. The current free cash flow for the company is $ 10 per share.

answer is A) $206 B) $61.31

Explanation:

to calculate price of the stock at zero we use dividend discount model formula

P0= D(1+G)/(r-g)

     10(1.03)/(0.08-0.03)

       $206

b) The dividend is said to be 2% of the free cash flow therefore can be calculated as $10*0.2=$2 per share

then calculate divide growth rates

D1=2*1.3 =2.6

D2=2*(1.3)(1.3)=3.38

D3 = 2*(1.3)(1.3)(1.3)=4.394

Claculate the discount rate using CAPM according to given information

R= 0.2+ 1.5(0.08-0.02)

 = 0.11/11%

Use the dividend discount model to calculate the price of the stock

P0= 2.6/1.11+3.38/1.3²+4.394*(1.05)/(0.11-0.05)

2.342+2.743+56.225

=$61.31

answer; organization;

answer; by looking at total product,marginal product,and changes in both after changes in inputs