Question 4 (20 points) (Stock Valuation)

Z-Corp expects a $2 dividend next year with a 5% dividend growth rate. But due its risky profile, Z-Corp has a 1.5 beta. What price would you buy the stock? Assume 3% risk free rate and 9% for the market risk premium.

Assuming the same discount rate you found above, what should the price of the stock price be 5 years from now?

What do you think are the shortfalls of the dividend discount model? What other stock valuation methods could you use?