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%
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
Section: Chapter Questions
Problem 1PS
Related questions
Question
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
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:
Step by step
Solved in 4 steps
Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education