Question
IntegrativeRisk and valuationGiant Enterprises' stock has a required return of 13.9%. The company, which plans to pay a dividend of $2.29 per share in the
IntegrativeRisk and valuationGiant Enterprises' stock has a required return of 13.9%. The company, which plans to pay a dividend of $2.29 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 Dividend per Share
2019 $2.14
2018 $2.00
2017 $1.87
2016 $1.75
2015 $1.63
2014 $1.53
2013 $1.43
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.(Hint:Round the computed dividend growth rate to the nearest whole percent.)
c.Explain what effect, if any, a decrease in the risk premium would have on the value of Giant's stock.
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