Question
You want to buy Burrito Inc. stock. They pay annual dividends, with the next dividend of $0.45 per share being paid later today. You believe
You want to buy Burrito Inc. stock. They pay annual dividends, with the next dividend of
$0.45 per share being paid later today. You believe that, during the next 10 years, their annual
dividends will grow by 45% APR, compounded annually. But after 10 years, their annual
dividends will grow more slowly... only at 4% APR, compounded annually.
Burrito Inc. has a beta of 1.78. The risk-free rate of return is 3%, and the average risk
premium is 6%. What should be the price of a share of Burrito stock? (You can assume that
the return given by the CAPM is compounded annually).
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