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25. The required rate of return of this stock is a. 6% b. 14% c. 16% d. 23.5% 26. The valuation of the stock is a. $12.5 b. $


Questions 21-27 are based on the following information. CAPM and stock valuation Your aunt, Beth, plans to invest in the comm
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Answer #1

25 .  

Dividend just paid =   2
Growth rate (g)=   7%
D1= D0*(1+g)  
2*(1+7%)=   2.14
Required Return (ke) as per CAPM = Risk free rate + (Beta*(Market Return - Risk free rate)  
6% + (1.25*(14%-6%)=   16.00%
Required Return is 16%  
  
26  
Current price or Fair value of stock = D1/(ke - g)  
2.14/(16%-7%)  
23.77777778  
Valuation of stock is $23.78  


27  
Share Current price in market is $25 which is more than valuation of stock $23.78. So do not buy the stock because this is overpriced .

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