Question

need help with questions 5 and 6 please

Question 5 (1 point) You are considering buying common stock in Grow On, Inc. You have projected that the next dividend the company will pay will equal $3.90 and that dividends will grow at a rate of 6.0% per year thereafter. If you would want an annual return of 25.0% to invest in this stock, what is the most you should pay for the stock now? $21.76 $20.53 $15.60 $16.54 $22.43 Question 6 (1 point) You are considering buying common stock in Grow On, Inc. You have projected that the next dividend the company will pay will equal $5.60 and that dividends will grow at a rate of 7.0% per year thereafter. The firm's beta is 2.28, the risk-free rate is 6.7%, and the market return is 15.8%. What is the most you should pay for the stock now? $29.30 $27.38 $20.40

Answer 1

Question 5:

This question requires application of constant growth dividend discount model according to which: Po - Divi T-9 Po = Price of Stock Divi = Estimated Dividends for Next Period r = Required Rate of Return 9= Growth Rate

3.90 PO = 0.25 -0,06

---> Answer

Po = 20.53

Question 6:

Additionally to the formula above, we need to use CAPM here as well.

Based on CAPM, Expected return on stock = Risk free rate + Beta * (Expected market return - Risk free rate)

Required return = 6.7% + 2.8 * (15.8% - 6.7%)

Required return = 32.18%

5.60 Fo03218- 0.07

Po = 22.24