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Diamond House Exporting has a beta of 1.22, the risk-free rate of interest is currently 4%, and the required return on the market portfolio is
Diamond House Exporting has a beta of 1.22, the risk-free rate of interest is currently 4%, and the required return on the market portfolio is 13%. The company has estimated its earnings per share (E.P.S.) will be $2.45 in the coming year (2021) and anticipates that its future E.P.S. will be $2.80 in 2022 and $3.25 in 2023. In the year 2024 and beyond it assumes that its E.P.S. will grow at a constant rate of 5%.
- Estimate the value of Diamond House Exporting stock assuming E.P.S. grow at a constant rate of 6% each year forever.
- Estimate the value of Diamond stock assuming E.P.S. grow at the rate given in the data in the opening paragraph of the problem.
- Repeat part b, but now assume a major lawsuit has been filed against the company, and the potential loss has increased risk, causing investors to now require a 22% rate of return. What is the estimated price of the stock following the filing of the lawsuit?
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