Giant Enterprises’ stock has a required return of 14.8%. The company, which plans to pay a dividend of $2.60 per share in the coming year, anticipates that its future dividends will increase at an annual rate consistent with that experienced over the 2006–2012 period, when the following dividends were paid:
Year Dividend per share
2012 ………………….$2.45
2011 …………………. 2.28
2010 …………………. 2.10
2009 …………………. 1.95
2008 …………………. 1.82
2007 …………………. 1.80
2006 …………………. 1.73
a. If the risk-free rate is 8%, what is the risk premium on Giant’s stock?
b. Using the constant-growth model, estimate the value of Giant’s stock.
c. Explain what effect, if any, a decrease in the risk premium would have on the value of Giant’s stock.