The companys stock has a beta equal to 143 the riskfree rate

The company\'s stock has a beta equal to 1.43, the risk-free rate is 45 percent, and the market risk premium is 3.6 percent. What is your estimate ofthe stock\'s required rate of return? Answer in a percentage without the % sign, and round it to two decimal places, ie, 10.54 for 10.54% (or 0.1054). Your Answer:

Solution

1------------- Required rate of return = risk free rate+ Beta*Market risk premium

Risk free rate = 4.5%

Beta = 1.43

Market risk premium = 3.6

Required rate of return = 4.5 + 1.43*3.6 = 9.648 or 9.65

Required rate of return = 9.65

2--------------- Required rate of return of preferred stock = dividend/stock price

Dividend= 4

stock price = 42.93

Required rate of return of preferred stock = 4/42.93 = 0.0932 or 9.32%

Required rate of return of preferred stock =9.32%

3-------------------Stock price = Dividend*(1+growth rate) / Required rate of return – Growth rate

Stock price = 24.08

Dividend=2

Growth rate = 0.04

Stock price = Dividend*(1+growth rate) / Required rate of return – Growth rate

24.08 = 2*(1+0.04) / Required rate of return – 0.04

24.08 * (Required rate of return – 0.04) = 2.08

24.08 *required rate of return-0.9632 = 2.08

Required rate of return = 2.08+0.9632/24.08 = 0.1264 or 12.64%

Required rate of return =12.64%