Question

The risk-free rate is 4%; the market risk premium is 7%. PPR Company’s stock has a beta of 2. The last dividend was $4. The dividend is expected to grow at 6%. What is the expected price in four years?

I have a financial calculator if there is a way to do this on there.

Answer 1

ANSWER DOWN BELOW. FEEL FREE TO ASK ANY DOUBTS. THUMBS UP PLEASE.

As per CAPM model:

Re= Rf+(Rm-Rf)B

Re= required rate of return.

Rf= Risk-free rate.

Rm = return on the market.

Rm-Rf =Market Risk Premium.

B = Beta, systematic risk.

Re= 4%+7%×2 = 18%

As per Gordon Growth Model of Stock Valuation:

P4=D5/(Re-g)

Po= price of the share at time 4.

D5= expected dividend at time 5 = last dividend*(1+ growth rate)^5

= 4"(1.06)^5= 5.35

g= Growth rate = 6%

Re= cost of capital = 18%

P4=5.35/(18%-6%)

P4= $44.61 (Answer).