You are valuing a high-growth technology firm specializing in car batteries. For 2022 the company reported EPS of €2.12 and paid a dividend of €0.38 at the end of the year. For 2017 the same company had reported EPS of just €0.48. You are expecting the company to go through an extraordinary growth phase that will last for another 6 years, then pass through a transitional period that will last 5 years, and finally enter a stable growth period for the foreseeable future after that. The beta of the stock is estimated currently at 1.5, it is expected to remain so for the first period, and then is expected to fall (in a linear fashion) during the transitional period to its long-term value of 1.05. The risk-free rate is 4% and the risk premium of the market portfolio is estimated at 6.5%. The Net Income for 2022 is reported to be €5,650 and the book value of equity for 2021 and 2022 is €19,900 and €21,120, respectively. The tax rate on income is 35%. - Find the cost of capital that must be used for discounting the expected dividends of the stock under the DDM.

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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You are valuing a high-growth technology firm specializing in car batteries. For 2022 the company reported EPS of €2.12 and paid a dividend of €0.38 at the end of the year. For 2017 the same company had reported EPS of just €0.48. You are expecting the company to go through an extraordinary growth phase that will last for another 6 years, then pass through a transitional period that will last 5 years, and finally enter a stable growth period for the
foreseeable future after that. The beta of the stock is estimated currently at 1.5, it is expected to remain so for the first period, and then is expected to fall (in a linear fashion) during the transitional period to its long-term value of 1.05. The risk-free rate is 4% and the risk premium of the market portfolio is estimated at 6.5%. The Net Income for 2022 is reported to be €5,650 and the book value of equity for 2021 and 2022 is €19,900 and €21,120, respectively. The tax rate on income is 35%.

- Find the cost of capital that must be used for discounting the expected dividends of the stock under the DDM.

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