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In: Finance

Stock PJ, which has a beta of 1.6, paid a dividend of $0.47 today. You believe...

Stock PJ, which has a beta of 1.6, paid a dividend of $0.47 today. You believe that Stock PJ can sustainably increase its dividend by 3.2% per year. The risk-free rate is 3.3% per year and the market risk premium is 5.9%. According to these numbers and assumptions, what should the price of Stock PJ be today? Round to the nearest penny.

Solutions

Expert Solution

Please note the solution:

> Formula

  • As per CAPM

Re = Rf + ( Rm - Rf ) * B

where Re = Required return

           Rf = Risk free rate

           Rm = Market return

            B = Beta

  • Market Price = D1 / [ Re - g ]

Where D1 = Next year Dividend = D0 * ( 1 + g )

           Re = Required return

           g = growth rate

> Calculation

  • Required return = 3.3 + 5.9 * 1.6

                                     = 12.74 %

  • Price = [ 0.47 * ( 1 + 0.032 ) ] / [ 0.1274 - 0.032 ]

                    = [ 0.48504 ] / 0.0954

                    = $ 5.0843 Answer

> Answer

The Stock PJ price should be $ 5.08.

Hope you understand the solution.

jeff jeffy answered 1 year ago
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