Question

Mary's stock is selling for $60 in the market. Its beta is 1.55, the rate of return on the market is 15%, and the real rate (r*) and the inflation premium (IP₁) year 1 are 4% and 5%, respectively. The dividend paid was $3.6 and dividends are expected to grow at a constant rate.  What is the growth rate(g) for this stock?

Answer 1

Solution -

A you know real rate is given in the question as it means it is free from any risk

Calculation of growth rate -

Step 1-As the real rate is given in question hence it will be considered as risk free rate @ 4%

We can now work out cost of equity using capital asset pricing model

Cost of Equity
= rf + Equity Risk Premium
= rf + Beta × Market Risk Premium 4
=

=4%+1.55*5

=11.75%

Now as per gorden model -

Po = D1/ke- g

P0 = Current market price

D1= Current dividend

Ke = Cost of equity

g = Growth rate

60 = $3.60/1175%-g

g = 5.75%