Adams and collin enterprises expect earnings and dividends to grow at a rate of 25% for the next 4 years, after the growth rate in earnings and dividends will fall to 3%. the company's last dividend was $1.25, its beta is 1.20, the market risk premium is 5.50%, and the risk- free rate is 3.00%. what is the current price of the common stock?

3. what is the intrinsic price of this company's stock?

4. if the stock is currently priced at $40.00, given your answer to question 3, would you purchase this security?

the intrinsic value of the stock is 42.97

If the stock is priced at 40 dollars it would be a good idea to purchase the share as will provide a better yield than the cost of capital of 9.6%

Explanation:

First, we solve for the cost of equity using the CAPM:

risk free =0.03

market rate =0.09

premium market = (market rate - risk free) = 0.055

beta(non diversifiable risk) = 1.2

Ke = 0.09600

Now we solve for the intrinsic price using the gordon model

with multi-stage growth:

First, we calcualte the future dividends

grow rateDividends

0                1.25

10.25       1.5625

20.25       1.953125

30.25       2.44140625

40.25       3.051757813

40.03     3.143310547

Now in the last year, we calcualte using the gordon model or constant grow:

32.7128182

Now we calculate and add together the present value of each of this future cash flow to determnate the intrinsic  value ofthe share:

Present Value

11.5625 / (1+0.096)^1     =  1.425638686

21.953125 / (1+0.096)^2 = 1.625956531

and so on, giving the following values:

31.854421226

42.114987712

present value of the future dividends at 3% 22.67126448

Finally we add them and get:

42.97160726

answer; i believe that the correct answer is (personal information and career information; second answer; (b) flexibility,independence and salary potential

y=mx+b is the right slope of velocity carry the 4 over