A stock is selling for $80 in the market. The company’s beta is 1.5, the market risk premium (rM - rF) is 6%, and the risk-free rate is 2%. The most recent dividend paid is D0 = $2 and dividends are expected to grow at a constant rate g. What’s the dividend growth rate g for this stock?     7.68%     4.19%     7.81%     8.29%

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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A stock is selling for $80 in the market. The company’s beta is 1.5, the market risk premium (rM - rF) is 6%, and the risk-free rate is 2%. The most recent dividend paid is D0 = $2 and dividends are expected to grow at a constant rate g. What’s the dividend growth rate g for this stock?

   

7.68%

   

4.19%

   

7.81%

   

8.29%

Expert Solution
Step 1

First calculate the cost of equity of the stock using the CAPM model. According to the CAPM model the cost of equity is  the beta times the market risk free plus the risk free rate.

 

Formula of CAPM model:

Cost of equity = Risk free rate + beta ×market risk premium

 

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