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Cartwright Brothers’ stock is currently selling for $31 a share. The stock is expected to pay...

Cartwright Brothers’ stock is currently selling for $31 a share. The stock is expected to pay a $4 dividend at the end of the year. The stock’s dividend is expected to grow at a constant rate of 8 percent a year forever. The risk-free rate is 6 percent and the market risk premium is also 6 percent. What is the stock’s beta?

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Formulas:

As per Gordon Growth Model of Stock Valuation:

P=D1/(Re-g)

P= price of the share.

D1= dividend

g= Growth rate

Re= cost of capital.

P=D1/(Re-g)

As per CAPM model:

Re= Rf+(Rm-Rf)B

Re= required rate of return.

Rf= Risk-free rate.

Rm = return on the market.

Rm-Rf =Market Risk Premium.

B = Beta, systematic risk.

Beta= 2.48 (Answer).

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