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You are considering the purchase of a new stock. The stock is forecasted to pay a...

You are considering the purchase of a new stock. The stock is forecasted to pay a dividend next year (D1) of $1.88. In addition, you forecast that the firm will have a stable growth rate of 4.9% for the foreseeable future. The current risk-free rate of return is 3%. The expected return on the market is 7.9% and the standard deviation for the market is 16%. The stock has a correlation to the market of 0.27. Finally, the stock has a standard deviation of 30%.

Given this information, what is the value of this stock? (Hint: Use the constant growth pricing model)

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Answer #1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

Cell reference -

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.

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