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Suppose that a financial analyst collected the following data: rate of return on T-bill is 2.5%...

Suppose that a financial analyst collected the following data: rate of return on T-bill is 2.5%

Market risk premium is = 5%; company's beta is 0.7; D1 = $2.00; current stock price is

$30.00; future growth of dividends is 6%.

What estimate should the analyst use?

Solutions

Expert Solution

As per CAPM Model,

Required Rate = Rf + Beta(Rm - Rf)

Required Rate = 0.025 + 0.70(0.05)

Required Rate = 6.0%

As per Constant Dividend Growth Model,

Stock Price = D1/(r - g)

r = 2/30 + 0.06

r = 12.67%

jeff jeffy answered 2 years ago
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