Question

What should be the price of a stock with a beta of 1.8 that just paid a dividend of $1.25 expected to grow at 8% if the risk-free rate is 3% and the expected market return is 10%? O A. $17.76 OB. $56.82 OC. $61.36 OD. $16.45

Answer 1

Ans ) a $17.76

1st we need to calculate return on equity .

Return on Equity = rf + b (rm - rf)

where rf = Risk Free Rate = 3%

rm = Return on Market = 10%

b = beta = 1.8

Return on Equity = 3+ 1.8 (10 - 3) = 3 + 1.8 (7) = 15.6%

Now stock Price = D1 / (Re - G)

Where D1 = Dividend after a year = 1.25 * 1.08

Re = Return on Equity = 15.6% Calculated above

G = Growth Rate = 8%

Stock Price = 1.25 * 1.08 / (.1560 - 0.08)

= 1.35 / 0.076 = 17.76, hence answer is a

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