value 062 points The riskfree rate of return is 5 the requir

value 062 points The risk-free rate of return is 5%, the required rate of return on the market is 10%, and High-Flyer stock has a beta coefficient of 1.1. If the dividend per share expected during the coming year, D1, is $2.60 and g-4%, at what price should a share sell? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Share price $ References eBook & Resources Worksheet Leaming Objective: 13-02 Calculate the intrinsic value of a firm using either a constant-growth or multistage dividend discount model Check my work O Type here to search Et

Solution

According to CAPM,

Re = Rf + Beta(Rm - Rf)

= 0.05 + 1.1(0.10 - 0.05) = 0.05 + 0.055 = 0.105, or 10.5%

P0 = D1/(r - g)

= $2.60/(0.105 - 0.04) = $2.6/0.065 = $40