Use the following information to answer questions 1-5
Today is Jan. 1, 2017. The expected dividend per share of ABC company by Dec 31, 2017 is $1.10. The annual growth rates are 10%, 8% and 6% for the years 2018, 2019, and 2020 respectively and then there will be a constant annual growth rate of 4% thereafter. The 10-year treasury note is 2%. In terms of beta, the ABC company is twice as risky as the general market. The market risk premium is 6%. The stock is currently trading at $20.
Q1. The expected dividend in December of the year 2020 is $.............
Q2. The discount rate for the stock of ABC company is ................
Q3. Assuming a discount rate of 10% (other information the same as mentioned in the case above) the price as of Jan 1, 2021 should be $...................
Q4. List three limitations of this type of model that we use for pricing a stock.
a.
b.
c.
Q5. If the intrinsic price (your computed price) as of today is $19, what is your recommendation (BUY, SELL, or NOT TRADE) if the margin of error is 10%