Question

In: Finance

Bob's Burgers has a beta of .8 and just paid a dividend of $1.2 that is...

Bob's Burgers has a beta of .8 and just paid a dividend of $1.2 that is expected to grow at 3.5%. If the risk-free rate is 3% and the market risk premium is 6%, what should be the price of the stock?

Expert Solution

Information provided:

Risk free rate= 3%

Market risk premium= 6%

Beta= 0.8

Current dividend= $1.2

Dividend growth rate= 3.5%

First, the required return on a stock is calculated using the Capital Asset Pricing Model (CAPM)

The formula is given below:

Ke=Rf+[E(Rm)-Rf]

where:

Rf=risk-free rate of return which is the yield on default free debt like treasury notes

Rm=expected rate of return on the market.

Rm-Rf= Market risk premium

= Stock’s beta

Ke= 3% + 0.8*6%

= 3% + 4.80%

= 7.80%

Price of the stock is calculated with the help of the dividend discount model.

It is computed using the below formula:

Share price=D1/(r-g)

where:

D1=next dividend payment

r=interest rate

g=firm’s expected growth rate

Share price= $1.2*(1 + 0.035)/ 0.078 – 0.035

= 1.2420/ 0.0430

= $28.88.

In case of any query, kindly comment on the solution

jeff jeffy answered 1 year ago

The Duo Growth Company just paid a dividend of $1.2 per share. The dividend is expected...

The Duo Growth Company just paid a dividend of $1.2 per share. The dividend is expected to grow at a rate of 24% per year for the next 3 years and then to level off to 6% per year forever. You think the appropriate market capitalization rate is 21% per year. a. What is your estimate of the intrinsic value of a share of the stock? b. If the market price of a share is equal to this intrinsic value,...

4) A company XYZ has a beta of 1.3. The company just paid a dividend of...

4) A company XYZ has a beta of 1.3. The company just paid a dividend of $0.95, and the dividends are set to grow at the rate of 4.5% a year. The expected return on the market index is 11% and T bills are yielding 4.3% The recent stock price is $64. Calculate the cost of equity using the dividend discount model method. Calculate the cost of equity using the SML method. Why are the answers different in parts (a)...

Dunder-Mifflin has a beta of 1.8 and just paid a dividend of $0.85 that is expected...

Dunder-Mifflin has a beta of 1.8 and just paid a dividend of $0.85 that is expected to grow at 3.5%. If the risk-free rate is 3% and the expected market return is 9%, what should be the price of the stock? A. $17.35 B. $8.54 C. $8.25 D. $17.95

Kmart shares have a beta of 1.05. The company has just paid a dividend of $1.10,...

Kmart shares have a beta of 1.05. The company has just paid a dividend of $1.10, and the dividends are expected to grow at 2.5%. The expected return of the market is 9% and the risk-free rate is 1.5%. The most recent share price for Kmart’s shares is $51. a. Calculate the cost of equity using the dividend growth model method. b. Calculate the cost of equity using the SML method. c. Why do you think your estimates in a...

ABC, Inc. just paid a dividend of $1.2. The dividends are expected to grow at 5.09%...

ABC, Inc. just paid a dividend of $1.2. The dividends are expected to grow at 5.09% each year forever. The required rate of return on the stock is 24.79%. What is today's price of the stock? Enter your answer rounded off to two decimal points. Do not enter $ or comma in the answer box.

7-Suppose that your company just paid a dividend of $1.2; the dividends are expected to grow...

7-Suppose that your company just paid a dividend of $1.2; the dividends are expected to grow at a constant rate of 5% indefinitely. Today’s market price/share is $45. Suppose also that your company has some bonds outstanding in the market selling for $1,035. The bonds have 8 years left to maturity, with 8% coupon rate with semi-annual payments. If your company’s capital structure is 35% debt and 65% equity, with the tax rate of 40% what is the WACC? Your...

Best Buy has just paid a dividend of $4 per share (this dividend is already paid...

Best Buy has just paid a dividend of $4 per share (this dividend is already paid therefore it is not included in the current price). The companys dividend is estimated to grow at a rate of 35% in year 1 and 20% in year 2. The dividend is then expected to grow at a constant rate of 3.2% thereafter. The companys opportunity cost of capital is 12% what is the current value of Best Buy stock?

Microsoft has just paid a dividend of $1 per share (this dividend is already paid sometimes...

Microsoft has just paid a dividend of $1 per share (this dividend is already paid sometimes called Dividend 0). It is estimated that the companys dividend will grow at a rate of 35% in year 1 and 20% in year 2. The dividend is then expected to grow at a constant rate of 1% thereafter. The companys opportunity cost of capital is 11% what is an estimate Microsofts stock using the nonconstant growth technique?

Stoneworks, Inc., has an odd dividend policy. The company has just paid a dividend of $15...

Stoneworks, Inc., has an odd dividend policy. The company has just paid a dividend of $15 per share and has announced that it will increase the dividend by $3 per share for each of the next five years, and then never pay another dividend. If you require a return of 11 percent on the company’s stock, how much will you pay for a share today?

JustKidding Corporation has an odd dividend policy. The company has just paid a dividend of $9...

JustKidding Corporation has an odd dividend policy. The company has just paid a dividend of $9 per share and has announced that it will increase the dividend by $4 per share for each of the next five years, and then never pay another dividend. If you require a return of 10 percent on the company’s stock, how much will you pay for a share today?