Question

Question Five (3 points) Given the following information about the GM stock: The standard deviation of the stock returns=0.10; the standard deviation of the market returns 0.05; the correlation coefficient between the stock's return and the market returns 0.75, T-bill annual return -0.04/Market return= 0.12. Company GM has distributed $80 million out of the $100 Million that it had made as a profit. The number of outstanding shares = 10 Million. GM total Assets of $ 1 billion and total liabilities of $500 million. B I S Calculate the stock's price Eg- Soon

Answer 1

ROE = Net Income / Equity

= $100 million / [$1 billion - $500 million] = $100 million / $500 million = 0.20, or 20%

g = ROE * b = 0.20 * [1 - ($80 million / $100 million)] = 0.20 * 0.20 = 0.04

Dividend per share(D0) = Total Dividends / Shares outstanding = $80 million / 10 million = $8

beta = correlation(i,m) * [S.D.(i) / S.D.(m)]

= 0.75 * [0.10 / 0.05] = 1.50

According to the CAPM,

r = rF + beta[rM - rF]

= 0.04 + 1.50 * [0.12 - 0.04] = 0.04 + 0.12 = 0.16, or 16%

P0 = [D0 * (1 + g)] / [r - g]

= [$8 * (1 + 0.04)] / [0.16 - 0.04]

= $8.32 / 0.12 = $69.33