Question

The stock of the MoMi? Corporation is currently trading for $40 per share. The company is expected to pay dividend of $2 per share at the end of the year. The dividend is expected to grow indefinitely by 6% per year. The risk-free rate of return is 5% and the expected rate of return on the market is 9%. What is the beta of the stock?

Answer 1

price of share = expected dividend / (required return - growth rate)

required return = risk free rate + (beta * (expected market return - risk free rate))

Let us say the beta is B. Then :

required return = 0.05 + (B * (0.09 - 0.05))

required return = 0.05 + 0.04B

price of share = expected dividend / (required return - growth rate)

40 = 2 / (0.05 + 0.04B - 0.06)

0.05 + 0.04B - 0.06 = (2 / 40)

B = ((2 / 40) + 0.06 - 0.05) / 0.04

B = 1.50

beta of the stock = 1.50