Question
Integrative - Risk and valuation Giant Enterprises' stock has a required return of 12.9%. The company, which plans to pay a dividend of $2.13 per
Integrative - Risk and valuation
Giant Enterprises' stock has a required return of 12.9%. The company, which plans to pay a dividend of $2.13 per share in the coming year, anticipates that its future dividends will increase at an annual rate consistent with that experienced over 2013-2019 period, when the following dividends were paid.
Year: 2019 Dividends per Share: $2.01
Year: 2018 Dividends per Share: $1.90
Year: 2017 Dividends per Share: $1.79
Year: 2016 Dividends per Share: $1.69
Year: 2015 Dividends per Share: $1.59
Year: 2014 Dividends per Share: $1.50
Year: 2013 Dividends per Share: $1.42
a. If the risk-free rate is 4%, what is the risk premium on Giant's stock?
b. Using the constant-growth model, estimate the value of Giant's stock.
c. Explain what effect, if any, a decrease in the risk premium would have on the value of Giant's stock
c.
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