P7-21 Integrative-Risk and valuation

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:

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a. If the risk-free rate is 10%, 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?


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