Homework SourseThe riskfree rate of return is 6 the expected rate of return
The risk-free rate of return, is 6%; the expected rate of return on the market is 13%; Company Z%u2019s common stock has a beta coefficient of 1.8. If the dividend expected during the coming year, D1, is $2.35, and if dividends are expected to increase at an annual rate of g = 5%, at what price would Company Z%u2019s stock sell?
| $14.50 | ||
| $17.28 | ||
| $ 9.63 | ||
| $19.35 | ||
| $21.24 | ||
| $13.65 |
The risk-free rate of return, is 6%; the expected rate of return on the market is 13%; Company Z%u2019s common stock has a beta coefficient of 1.8. If the dividend expected during the coming year, D1, is $2.35, and if dividends are expected to increase at an annual rate of g = 5%, at what price would Company Z%u2019s stock sell?
The risk-free rate of return, is 6%; the expected rate of return on the market is 13%; Company Z%u2019s common stock has a beta coefficient of 1.8. If the dividend expected during the coming year, D1, is $2.35, and if dividends are expected to increase at an annual rate of g = 5%, at what price would Company Z%u2019s stock sell?
$14.50
$17.28
$ 9.63
$19.35
$21.24
$13.65
| $14.50 | ||
| $17.28 | ||
| $ 9.63 | ||
| $19.35 | ||
| $21.24 | ||
| $13.65 |
Solution
Hi,
Please find the answer as follows:
Expected Return on the Stock (Ke) = Rf + B(Rm - Rf) = 6 + 1.8*(13 - 6) = 18.6%
Stock Price = D1/(Ke - g) = 2.35/(.186 - .05) = 17.28
Answer is 17.28
Thanks.
