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The following information is given for a stock. Investors assume that the return of the stock...

  1. The following information is given for a stock. Investors assume that the return of the stock is best explained by a two-factor model that includes the market factor and a second risk factor. Using a dividend discount model, what is the price for this stock?

Stock covariance with the market= 0.5

Market variance = 0.25

Stock covariance with a second risk factor= 0.6

Variance of the second factor= 0.3

Market Premium:3%

Second factor risk premium=1%

Risk free rate =2 %

Current earnings per share= $5,

The ROE is expected to shrink (decrease) at the rate 10% for first 5 years

The ROE is expected to growat the rate 8% forever after the first 5 years

Payout for the first 5 years: 50%

Payout after 5 years: 50%

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jeff jeffy answered 1 year ago
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