A stock with a beta of 0.6 just paid a dividend of $0.75 and is price...

Question

Question

Answer 1

Answer #1

Cost of equity as per CAPM model = Risk free rate + Beta of stock * Market risk premium

= 3% + 0.6 * 6% = 6.60%

As per the constant growth model of dividend,

Price of share = Dividend In Year 1 / (Cost of equity - Growth rate)

P = D0 *(1+g) / (r-g)

We need to find g

42 = (0.75 + 0.75g) / (6.60% -g)

2.772 - 42g = 0.75 + 0.75g

42.75g = 2.022

g = 4.73%

Correct choice B

Answer 2

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