A share of stock sells for $50 today. The beta of the stock is .8, and...

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.)

Solutions

Expert Solution

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

jeff jeffy answered 2 years ago

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