Question

Stock D currently is selling for $40, and its beta is 1.4. It is expected to pay a dividend of $2 per share at the end of the year. The risk-free rate is 5%, and the expected market return is 15%. What is the expected share price of D at the end of the year?

A. $37.4

B. $21.8

C. $45.6

D. $51.5

Answer 1

The share price is computed as shown below:

= Current share price (1 + growth rate)

growth rate is computed as shown below:

= Expected return - (expected dividend / current stock price)

Expected return is computed as follows:

= risk free rate + beta (return on market - risk free rate)

= 0.05 + 1.4 (0.15 - 0.05)

= 19% or 0.19

So, the growth rate will be computed as follows:

= 0.19 - $ 2 / $ 40

= 14% or 0.14

So, the price of the stock will be computed as follows:

= $ 40 x 1.14

= $ 45.6

So, the correct answer is option C.

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