Question

Temple Lunch​ Trucks, Inc. just paid a dividend of​ $2.00. Dividends are expected to grow at...

Temple Lunch​ Trucks, Inc. just paid a dividend of​ $2.00. Dividends are expected to grow at a rate of​ 3% per year from here on out. If the​ risk-free rate is​ 2%, the MRP is​ 8%, and Temple Lunch​ Trucks’ stock is only​ 40% as risky as the​ market, what is the most that you should be willing to pay for a share of this stock​ today?

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Risk free rate= 2%

Market risk premium= 8%

Since the company is only 40% as risky as the market, the beta is 0.4.

The formula for calculating the required rate of return on the stock is given below:

Ke=Rf+b[E(Rm)-Rf]

Where:

Rf=risk-free rate of return

Rm=expected rate of return on the market.

Rm-Rf= Market risk premium

b= Stock’s beta

Ke= 2% + 0.4*8%

     = 2% + 3.20% = 5.20%.

Next, the price of the stock is calculated using the dividend discount model.

Price of the stock today=D1/(r-g)

where:

D1=next dividend payment

r=interest rate

g=firm’s expected growth rate

Price of the stock today= $2*(1+0.03)/ 0.052- 0.03

                                     = $2.06/ 0.0220 = $93.64.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
JTBC, Inc. just paid $2.00 dividend. Dividends are expected to grow at a 20% rate for...
JTBC, Inc. just paid $2.00 dividend. Dividends are expected to grow at a 20% rate for the next four years. After that, the company has stated that the annual dividend will be $1.00 per share indefinitely. The required rate of return is 10%. a) What is the current stock price?
MasksAreUs Inc. just paid a dividend of $3 per share. Future dividends are expected to grow...
MasksAreUs Inc. just paid a dividend of $3 per share. Future dividends are expected to grow at a constant rate of 5% per year. What is the value of the stock if the required return is 8%?
A firm has just paid a dividend of 11, dividends are expected to grow at 3%...
A firm has just paid a dividend of 11, dividends are expected to grow at 3% in the future. If the firm has a beta of 0.8 and the market risk premium and risk free rate are 10.7% and 3.2% respectively, then what is the intrinsic value of this firm today?
A7X Corp. just paid a dividend of $1.50 per share. The dividends are expected to grow...
A7X Corp. just paid a dividend of $1.50 per share. The dividends are expected to grow at 40 percent for the next 10 years and then level off to a growth rate of 6 percent indefinitely.     If the required return is 15 percent, what is the price of the stock today?
1. You buy a stock from which you expect to receive an annual dividend of $2.50...
1. You buy a stock from which you expect to receive an annual dividend of $2.50 for each of the three years that you plan on holding it. At the end of year three, you expect o be able to sell the stock for $185. What is the most that you should be willing to pay today for a share of this company if you want to earn a return of atleast 9%? A) $68.75 B) $149.18 C) $192. 50...
25. Xenon, Inc. just paid a dividend of $1.25 (Do). This dividend was paid out of...
25. Xenon, Inc. just paid a dividend of $1.25 (Do). This dividend was paid out of $2.00 earnings per share that the company made this year. Dividends are expected to grow at a rate of 20 percent for the next 2 years, then drop to a constant growth rate of 5 percent thereafter. If the required rate of return for this stock 12 percent, what is the company's PE ratio today? Show your work in the uploaded document
Question #7 ABC,. Inc just paid a dividend of $49.49. The dividends are expected to grow...
Question #7 ABC,. Inc just paid a dividend of $49.49. The dividends are expected to grow by 21% in Years 1-4. After that, the dividends are expected to grow by 6% each year. If the required rate of return is 23%, what is today's price of the stock?
1) A stock just paid a dividend of $0.50. If the dividend is expected to grow...
1) A stock just paid a dividend of $0.50. If the dividend is expected to grow 3% per year, what will the price be if the required return is 9%? 2) A stock is expected to pay a dividend of $1 at the end of the year. The required rate of return is 11%, and the expected growth rate is 5%. What is the current stock price? 3) A stock just paid a dividend of $1. The required rate of...
The Kosten Warenhaus just paid a dividend of $2.00 (D0 = $2.00)per share, and that dividend...
The Kosten Warenhaus just paid a dividend of $2.00 (D0 = $2.00)per share, and that dividend is expected to grow at a constant rate of 7.50% per year in the future. The company’s beta is 0.93, the market return is 9.0%, and the risk-free rate is 4.00%. 1. What is the required return on the stock, rs? [Hint: Kj=Krf + B(Km – Krf)] 2. What is the company’s current stock price?
Moon Inc. paid a dividend of $3 this year. The dividends you expect to grow at...
Moon Inc. paid a dividend of $3 this year. The dividends you expect to grow at 3% a year forever. The risk free rate is 3% and you require a risk premium of 5%. What is the value of the stock based on the dividend discount model? (10 points)? If the price of the stock in the market is $60 a share, should you buy it and why?
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT