Question

Firm DCF, ROE = 35% , Dividend Payout Ratio=70%, next year’s earning per share (EPS) = $8.00, assuming that market expected return is 20% and the risk-free rate is 5%. If increasing DPR will decrease firm value and we can use the constant dividend growth model to value the stock price, the stock beta must be larger than_____ and less than_____

(don't tell me the answer is 2.0 and 2.4) <- it's wrong

(two decimals)

Answer 1

risk free rate+beta*(market return-risk free rate)>growth rate
risk free rate+beta*(market return-risk free rate)>RoE*(1-DPR)
=>5%+beta*15%>35%*(1-70%)
=>beta>5.50%/15%
=>beta>0.36667

and
5%+beta*15%<35%
=>beta<2

the stock beta must be larger than 0.37 and less than 2.00