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A stock just paid a dividend of $2.87. The dividend is expected to grow at 21.52%...

A stock just paid a dividend of $2.87. The dividend is expected to grow at 21.52% for two years and then grow at 3.54% thereafter. The required return on the stock is 12.49%. What is the value of the stock?

A stock has an expected return of 15.00%. The risk-free rate is 1.49% and the market risk premium is 6.89%. What is the β of the stock?

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Answer #1

The value of the stock is computed as follows:

= Dividend at end of year 1 / ( 1 + required rate of return )1 + Dividend at end of year 2 / ( 1 + required rate of return )2 + ( 1 / required rate of return )2 [ ( Dividend at end of year 3 ) / ( Required rate of return - growth rate ) ]

= ($ 2.87 x 1.2152) / 1.1249 + ( $ 2.87 x 1.2152 2 ) / 1.12492 + 1 / 1.12492 [ ( $ 2.87 x 1.21522 x 1.0354 ) / ( 0.1249 - 0.0354 ) ]

= $ 3.4876 / 1.1249 + $ 4.2382 / 1.12492 + 1 / 1.12492 x $ 49.03

= $ 45.20 Approximately

Beta of the stock is computed as follows:

Expected return = Risk free rate + Beta x Risk premium

0.15 = 0.0149 + Beta x 0.0689

= 1.96 Approximately

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