Question

In: Finance

You are considering a stock A that pays a dividend of $1. The beta coefficient of...

You are considering a stock A that pays a dividend of $1. The beta coefficient of A is 1.3. The risk free return is 6%, while the market average return is 13%.

a.What is the required return for Stock A?

b. If A is selling for $10 a share, is it a good buy if you expect earnings and dividends to grow at 6%?

Solutions

Expert Solution

a. Required return for Stock A 15.10%
Working:
As per Capital Asset Pricing model,
Required return = Risk free rate + Beta * (Market return - Risk free return)
= 6% + 1.3 * (13%-6%)
= 15.10%
b. Yes
Working:
As per dividend discount model, current price of stock is the present value of future dividends which is calculated as follows:
Price of stock = D0*(1+g)/(Ke-g) Where,
= 1.00*(1+0.06)/(0.1510-0.06) D0 Current dividend = $       1.00
= $    11.65 g Growth rate in dividend = 6%
Ke Discount rate = 15.10%
Current value of stock A is $ 11.65.But, it is selling at $ 10.It means that share is undervalued and it is good time to buy such stock.

jeff jeffy answered 4 days ago
Next > < Previous

Related Solutions

You are considering to purchase a preferred stock. This stock pays an annual dividend of $3.88....
You are considering to purchase a preferred stock. This stock pays an annual dividend of $3.88. How much is one share of this stock worth today if the rate of return is 9.50%?
Beta coefficient Given the following information, determine the beta coefficient for Stock L that is consistent...
Beta coefficient Given the following information, determine the beta coefficient for Stock L that is consistent with equilibrium:  = 14.75%; rRF = 3.15%; rM = 8.5%. Round your answer to two decimal places.
You find a stock priced at $27.35 with a beta of 1.5. The stock pays a...
You find a stock priced at $27.35 with a beta of 1.5. The stock pays a dividend of $1.20 and is expected to be priced at $28.50 next year. If the risk-free rate is 2% and the market risk premium is 6%, would you buy the stock?
What is the value of a dividend stock that pays a $3 dividend in yr 1,...
What is the value of a dividend stock that pays a $3 dividend in yr 1, a $3 dividend in yr 2, a $3.25 dividend in yr 3, then growing at 1% thereafter. TheWACC is 7% and the cost of equity is 9% A    47 b    35 c     49 d    37 2. I want to pull some cash out of my house by refinancing but I don’t want my pmt to increase. My initial mortgage was 200k and now the...
If you short sell a single share of stock and it pays a $1 dividend while...
If you short sell a single share of stock and it pays a $1 dividend while you are in the short position: Select one: a. You will definitely gain a dollar from the dividend payment b. You will likely lose a dollar from the dividend payment c. You will likely neither gain nor lose from the dividend payment d. Your broker will gain a dollar from the dividend payment
1. Given the following information, determine the beta coefficient for Stock L that is consistent with...
1. Given the following information, determine the beta coefficient for Stock L that is consistent with equilibrium: r^L = 9.5%; rRF = 2.5%; rM = 10.5%. Round your answer to two decimal places. 2. You have been managing a $5 million portfolio that has a beta of 1.35 and a required rate of return of 8.075%. The current risk-free rate is 2%. Assume that you receive another $500,000. If you invest the money in a stock with a beta of...
The preferred stock of Dragons Inc. pays a $1 dividend. What is the value of the...
The preferred stock of Dragons Inc. pays a $1 dividend. What is the value of the stock if your required rate of return is 10 percent? Mosser Corporation, Inc. paid a $4 dividend last year. At a constant growth rate of 6 percent, what is the value of the common stock if the investors require a 10 percent rate of return? HomeNet Inc. paid a $3 last year and the stock is currently selling for $60. If investors require a...
What are the limitations of the dividend discount model? A stock currently pays a dividend of...
What are the limitations of the dividend discount model? A stock currently pays a dividend of $4 for the year. Expected dividend growth is 20% for the next three years and then growth is expected to revert to 4% thereafter for an indefinite amount of time. The appropriate required rate of return is 10%. What is this stock’s intrinsic value? What is the rate of return on an investment that costs $500 and is sold after 1 year for $560?
What are the limitations of the dividend discount model? A stock currently pays a dividend of...
What are the limitations of the dividend discount model? A stock currently pays a dividend of $4 for the year. Expected dividend growth is 20% for the next three years and then growth is expected to revert to 4% thereafter for an indefinite amount of time. The appropriate required rate of return is 10%. What is this stock’s intrinsic value? What is the rate of return on an investment that costs $500 and is sold after 1 year for $560?
Consider a stock that currently pays a dividend of $0.85 a share. You have a required...
Consider a stock that currently pays a dividend of $0.85 a share. You have a required return on equities of 10%. a) If you expect the dividend to grow at a rate of 4% a year, what price would you place on the stock using the Gordon grown model? b) You are considering just holding the stock for one year. If you think the dividend next year will be 4% larger than the current dividend and the price next year...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT