Question

Middlefield Motors stock is expected to be priced at 61.34 dollars in 1 year. It is expected to pay its next dividend, which is expected to be 2.44 dollars, in 1 year. The stock has a beta of 0.73. The market has an expected return of 14.65 percent, the risk-free rate is 6.6 percent, and the inflation rate is 1.24 percent. What is the current price of Middlefield Motors stock?

Answer 1

Current market price of stock can be calculated through dividend discount model.

First we need to find the the required rate of return through Capital Asset pricing model.

Expected return=risk free rate+beta (market rate of return-risk free rate)

= 6.6+.73(14.65-6.6)

=12.4765%

growth rate of dividend has been taken of that of inflation of 1.24 %

D1=payment of dividend at the end of the year= 2.44

Ke=expected rate of return of equity= 12.4765

P0= D1/(ke-g)

Po= D1/(12.4765-1.24)

=[ 2.44/11.2365%]

= 21.7149

Current price of middlefield motors is 21.71