Question

The risk-free rate is 4%; the market risk premium is 8%. Prestige World Wide's stock has a beta of 3. The last dividend was $4 per share. The dividend is expected to grow at 5%. What is the expected price of the stock?

Select one:

a. $20.77

b. $21.21

c. $18.26

d. $19.21

Please explain steps and show work. Thank you.

Answer 1

Based on CAPM,

Expected return on stock = Risk free rate + Beta * market risk premium

Expected return on stock = 4% + 3 * 8%

Expected return on stock = 4% + 24% = 28%

Additionally, according to constant growth dividend discount model according to which

Divi Por-9

Div1 = $4 * (1 + 5%) = $4.20

4.20 ΓΟ-028 - 0,05

Po = 18.26 – --> Answer