Question

Suppose Lane and Company stock just paid a $6 dividend that is expected to grow by...

Suppose Lane and Company stock just paid a $6 dividend that is expected to grow by 6% for three years and then by 2% thereafter. Lane’s bonds are yielding 3%. The Beta of Lane stock is .90 and T-Bills are yielding 1%. What should be the price of Lane stock?

Select one:

a. $202.00

b. $200.00

c. $162.16

d. Not enough information is given to solve this problem

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Homework Answers

Answer #1

For calculating the price of stock using dividend discount model, three parameters are required,

Dividends, Growth rate in dividends and cost of equity.

In the above question, dividends and growth in dividends are given.

To calculate cost of equity using CAPM, risk free rate ir T bills yield is provided and Beta is provided.

However, Market return is needed to calculate Market risk premium as per CAPM.

Answer is d. Not enough information is given to solve this problem

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