Question

(Stocks) A stock with a beta of 1.36 is expected to pay a $1.57 dividend over the next year. The dividends are expected to grow at 2.33% per year forever. What is the stock's value per share (to the nearest cent, no $ symbol) if the risk-free rate is 0.21% and the market risk premium (i.e., the difference between the market return and the risk-free rate) is 7.79%? Note: You first need to find the required rate of return (r) using the CAPM equation. ______ Calculate the answer by read surrounding text.

Answer 1

- As per CAPM,

where, rf = Risk free return = 0.21%

Rmp = Market Risk Premium= 7.79%

Beta = 1.36

Required Return = 0.21% + 1.36(7.79%)

Required Return(ke) = 10.8044%

- Expected Dividend next year(D1) = $1.57

Expected growth rate(g) = 2.33% per year forever

Calculating the Stock's value per share:-

P0 = $17.95

So, the Stock's value per share is $17.95

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