Question

Financial managers of BECN firm plan to issue a stock with a $5 annual year-end dividend that will constantly grow at a growth rate g equal to 3%. If BECN firm has a beta 2.0, T-bills rate (i.e., risk-free rate) is 2%, and the market return is 5%. What price should the stock be sold at?

Answer 1

Answer -

We have to calculated expected return by CAPM method and then we will caculate value of stock.

Step 1-

Expected Return Ks		Rf +B(Rm-Rf)
		=2%+2*(3%)
		0.08
Where
Rf	Risk Free Return     2%
B	Beta    =2
Rm	Market Return    5%
Ks	8%
Step 2 -
Value of stock
Formula	D0(1+G)/(Ks-G)
	=5*(1.03)/0.05
Value of stock	103
Where
D0	Current Dividend    $5
G	Growth Rate   3%
Ks	Expected Return     8%
Hence value of stock currently should be $ 103