Question

A share of stock sells for $50 today. The beta of the stock is .8, and the expected return on the market is 18 percent. The stock is expected to pay a dividend of $.90 in one year. If the risk-free rate is 4.9 percent, what should the share price be in one year? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer 1

Calculation of growth rate
Stock price = D1 / r - g
Where,
D1 = Expected Dividend
r= required rate of return
g= growth rate
$50=0.9/0.1538-g
g =13.58%
Expected dividend in year 2 = $0.9*1.1358
=$1.02222
Share price in one year
Stock price = D1 / r - g
Where,
D1 = Expected Dividend
r= required rate of return
g= growth rate
=1.0222/0.1538-0.1358
=56.79