Question

Assume a major investment service has just given Oasis Electronics its highest investment rating, along with a strong buy recommendation. As a result, you decide to take a look for yourself and to place a value on the company's stock. Here's what you find: This year, Oasis paid its stockholders an annual dividend of $2.55 a share, but because of its high rate of growth in earnings, its dividends are expected to grow at the rate of 11% a year for the next 4 years and then to level out at 7% a year. So far, you've learned that the stock has a beta of 1.66, the risk-free rate of return is 7%, and the expected return on the market is 11%. Using the CAPM to find the required rate of return, put a value on this stock.

Answer 1

Value of Stock is $47.03
Dear Student
Thank you for using homeworklib
Please find below the answer
Statement showing Computations
Particulars	Amount
Beta, B	1.66
Return on Market, Rm	11.00%
Risk Free Rate, Rf	7.00%
Ke = Rf+ B(Rm-Rf)
Ke = 7% + 1.66 (11%-7%)
Ke = 7% + 1.66 (4%)
Ke = 7% + 6.64%
ke =13.64%
Statemnet showing Current Price
Particulars	Time	PVf 13.64%	Amount	PV
Cash inflows (Dividend)	1.00	0.8800	2.8305	2.49
Cash inflows (Dividend)	2.00	0.7744	3.1419	2.43
Cash inflows (Dividend)	3.00	0.6814	3.4875	2.38
Cash inflows (Dividend)	4.00	0.5996	3.8711	2.32
Cash inflows (Price)	4.00	0.5996	62.3803	37.40
Current Price of Stock				47.03
P4 = D5/(ke-g)
P4 = 3.8711*1.07/(13.64%-7%)
P4 = 4.1421/(6.64%)
P4 = $62.3803