A rapidly growing firm is currently paying a dividend of $1.75. The dividend growth rate is expected to be 8% for the next 6 years. The dividend growth rate after the first 6 years is expected to be 3% annually. The expected return on the market is 9%, the risk free rate is 5% and the firm’s Beta is 0.80.
a. Calculate estimated price (intrinsic value) for a share of this firm’s stock.
b. What does this firm’s Beta measure?