Question

A share of stock sells for $65 today. The beta of the stock is
1.5, and the expected return on the market is 12%. The stock is
expected to pay a dividend of $1.50 in one year. With the risk free
rate of return 3.41%, what will the share price be in one year,
just **after** the dividend is paid?

Select one:

A. 75.09

B. 72.59

C. 76.09

D. 75.59

E. 74.09

Answer #1

Growth rate = Ke - [ D1 / P0 ]

Ke = required Ret

D1= Expected Div

P0 = price today

Ke = Rf + Beta ( Rm - Rf)

Rf = Risk free ret

Rm = Market ret

Rm - Rf = Risk Premium

Beta = Systematic Risk

= 3.41% + 1.5 ( 12% - 3.41%)

= 3.41% + 1.5 (8.59% )

= 3.41% + 12.89%

= 16.3%

Growth rate = Ke - [ D1 / P0 ]

= 16.3% - [ 1.50 / 65 ]

= 16.3% - 2.31%

= 13.987%

P1 = D2 / [ Ke - g ]

D2 = D1 (1+g)

= 1.50 ( 1 + 0.14 )

= 1.50 * 1.13987

= 1.71

= D2 / [ Ke - g ]

= 1.71 / [ 16.3% - 13.99% ]

= 1.71 / 2.31%

= $ 74.09

Option E correct.

Pls do rate, if the answer is correct and comment, if any
further assistance is required.

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