Question

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 1.5. If the dividend per share expected during the coming year, D1, is $2.50 and g = 4%, at what price should a share sell? (Do not round intermediate calculations. Round your answer to 2 decimal places.

Answer 1

Step-by-step explanation:

k=Rf+B(E[r]-Rf): k=5%+1.5(10$-5%)=12.5%

V=2.4/(12.5%-4%)= 30

Answer 2

$ 29.41

Step-by-step explanation:

The first is to calculate the investor's required rate of return on the stock as shown below:

Ke=Risk-free rate+Beta*(return on the market-Risk-free rate)

Risk-free rate is 5%

Beta is 1.5

return on the market is 10%

Ke=5%+1.5*(10%-5%)=12.50%

The stock price formula is given below

stock price=D1/Ke-g

D1 is the expected dividend of $2.50

Ke is 12.50%

g =4%

Stock price=2.50/(12.50%-4%)=$ 29.41