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Bergman Corp. has experienced zero growth over the last seven years, paying an annual dividend of...

Bergman Corp. has experienced zero growth over the last seven years, paying an annual dividend of $2.00 per share. Investors generally expect this performance to continue. Bergman stock is currently selling for $24.39. The risk-free rate is 3.0%, and Bergman's beta is 1.3.

a. Calculate the return investors require on Bergman's stock

b. Calculate the market return

c. Suppose you think Bergman is about to announce plans to grow at 3.0% into the foreseeable future. You also believe investors will accept that prediction and continue to require the same return on its stock. How much should you be willing to pay for a share of Bergman's stock?

Solutions

Expert Solution

a)Required return on stock =D/price

                         = 2/24.39

                         = .0820 or 8.20%

b)using CAPM model ,

Expected return on stock =Risk free rate+ [Beta(Market return -risk free rate)]

       8.20 = 3+ [1.3 (MR - 3)]

       8.20 -3 = [1.3 MR - 3.9 ]

        5.2 +3.9 = 1.3MR

       MR = 9.1 / 1.3

               = 7%

Market return = 7%

c)Price =D0(1g)/(rs-g)]

         = 2(1+.03)/(.082 - .03)

         = 2 *1.03 / .052

       = $ 39.62 per share

jeff jeffy answered 4 weeks ago
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