Question

Requred ret the price and to rema Stock Alpha In any w bioren AB (URP) Beta: 1.50 102 to sur 19 & 4 + ISSO (MRP) Expected dividend $2.00 en bro 95.50(MRP) Risk free rate 42ng to los osos 3.5= MRP Required return an market = 9% 22 Calculate the price of the stock today if (ondends are expected to remain unchanged. 32.31 17. 39 30.72 12.12 1.52. o ne 23 Calculate the price of the stock today if dividends are expected to increase at a constant rate of 5% O 30.77 32. 31 12.12 17. 39 11.52 Impossible 24 Calculate the price of the stuck today if dividends fare expected to decrease at a constant tale of 5% 0 30.77 32.31 17.39 11.52 12.12 25 Calculate the price of the stock to day a thousand years from today if dividends are expected to decrease at a constant rate of infinity almost zero exachy zero so

Answer 1

As per CAPM model:

Required rate of return= Risk free rate+Beta*MRP

= 4%+1.5*(9%-4%)=11.5%

22. As per DDM model , Value of stock= Dividend*(1+g)/(K-g) (Where g= dividend growth rate and k= required rate of return)

When dividend is constant, g=0

Hence, value of stock= 2*(1+0%)/(11.5%-0%)=$17.39

23. Similiarly when g=+5%, then

price of stock=2*(1+5%)/(11.5%-5%)=$32.31

24. When g=-5%

the price of stock= 2*(1-5%)/(11.5%+5%)=$11.52

25. After thousand years Dividend= 2*(1-5%)^1000 or 0 (Approx)

Hence, value of stock= 0*(1-5%)/(11.5%+5%)=0 (Approx) or almost zero.