Suppose your selected company(choose one of the two) just paid a dividend of $ 2.20 per...

Suppose your selected company(choose one of the two) just paid a dividend of $ 2.20 per share. The dividend are to calculate the share's expected return. You observe that the risk-free rate of return on us treasuries is 2% p.a, the market risk premium is 7 % and the company's equity has a current beta of 1.285. what is the market value of the company's shares? Compare the actual closing price of your selected company's share on the balance sheet date. Why might the actual share price differ from the calculated price? explain. I choose Woolworth ltd in australia and the other company is Wesfarmers Ltd

Expert Solution

Our selected company is Woolworth.

We have:

Do = 2.20

Rf = 2%

MRP = 7%

Beta = 1.285

Required return = Rf + MRP x Beta

= 2% + 7% x 1.285

= 10.995%

Value of the stock = Do / Required return

= 2.20/ .10995

= $20.01

Current price of the stock is $26.85, which is way higher than the value of the stock calculated above. The reason for this difference can be demand supply factors, over expectation of investors or the new projects that the company is going to undertake and not discounted in the stock price. Based on its intrinsic value, the stock is over valued.

jeff jeffy answered 3 months ago

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