a. The risk premium on the stock is = Required return - risk free rate
= 14.8 % - 4%
= 10.8%
The historical growth rate of dividends is,
1.73* (1 + g) ^6 = $2.45
So, the growth rate of dividends is
g = 5.9721%
g = 6%
b. The constant growth model. the value of stock is,
Po = D1/(Re - g)
= $2.6/ ( 0.148 - 0.06)
= $29.5455
= $29.55 ( rounded off )
A decrease in risk premium , would lower the required return and which would increase the price of the stock.
Re = Rf + beta ( Rm - Rf)
If the risk premium is reduced, the required rate of return will also reduce.
Po = D1/ Re - g
So, as the required return decreases, the stock price increases. As the stock price and the required return are inversely related.
Please show how you solved Integrative-Risk and valuation Giant Enterprises' stock has a required return of...
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