Question

Suppose Con Edison Inc. had earnings per share of $2.95 in 2019 and a dividend payout ratio of 69.15%. If in 2020 the expected growth in dividends is 5%, beta is 0.75, Treasury Bill rate is 6% and market risk premium is 5.5%, what should be the expected value (price) of the company’s stock?

Answer 1

As per CAPM,
Required rate of return= Rf + (market risk premium*Beta)
Rf=Risk free interest	Rf=6%		Beta=0.75
Market risk premium =	5.50%
Required return=		6+(5.5*0.75)
			10.13

Expected dividend in 2020=	(2.95*69.15%)*(1.05)
			$2.14

As per gordon model,
Price of stock=	(Expected dividend)/(Required return-growth)
=	2.14/(0.1013-0.05)
=	$ 41.72