Question

6. Assume the risk-free rate is 6% and the market risk premium is 7%. The stock of Physicians Care Network (PCN) has a beta of 1.5. The last dividend paid by PCN (D) was $2 per share. What would PCN's stock value be if the dividend were expected to grow at a constant rate of negative 5%. Choice: $6.00 Choice: $8.84 Choice: $9.50 Choice: $17.60

Answer 1

HI

As per policy we will solve only top most question here.

6. Here risk free rate rf = 6%

market risk premium rm=7%

beta = 1.5

as per CAPM

rate of return k = rf+beta*rm

k = 6 + 1.5*7

k = 6+ 10.5

k = 16.5%

D0 = $2

growth rate g = -5%

k = 16.5%

As per dividend discount model

Current share price P0 = D0*(1+g)/(k-g)

P0 = 2*(1-5%)/(16.5%+5%)

P0 = 1.9/21.5%

P0 = $8.84

Hence second option is correct here.

Thanks