Cartwright Brothers’ stock is currently selling for $35 a share. The stock is expected to pay a $2 dividend at the end of the year. The stock’s dividend is expected to grow at a constant rate of 6 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?
| Calculation of Expected Return. | ||||||
| Expected Return | ||||||
| = (D1/P0) + g | ||||||
| Where, | ||||||
| D1 = Expected Dividend = $2 | ||||||
| P0 = Current Stock Priceh = $35 | ||||||
| g = Constant Growth Rate = 6% = 0.06 | ||||||
| Expected Return | ||||||
| = (D1/P0) + g | ||||||
| = ($2/$35) + 0.06 | ||||||
| = 0.0571 + 0.06 | ||||||
| = 0.1171 | ||||||
| i.e. 11.71% | ||||||
| Now, | ||||||
| Expected Return = Risk Free Rate + Beta*Market Risk Premium | ||||||
| 11.71% = 6% + Beta * 6% | ||||||
| Beta * 6% = 11.71% - 6% | ||||||
| Beta * 6% = 5.71% | ||||||
| Beta = 0.95 | ||||||
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