a) What is the required rate of return for the stock? b) What are the dividends for 4 years? c) What is the stock price at the end of year 3?

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
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A financial analyst estimates that the current risk-free rate for NN company
is 6.25 percent, the market risk premium is 5 percent, and NN's beta is 1.75.
The current earnings per share (EPS0) is RM2.50. The company has a 40
percent payout ratio. The analyst estimates that the company's dividend
will grow at a rate of 25 percent this year, 20 percent next year, and 15
percent the following year. After three years the dividend is expected to
grow at a constant rate of 7 percent a year. The company is expected to
maintain its current payout ratio. The analyst believes that the stock is
fairly priced.
a) What is the required rate of return for the stock?
b) What are the dividends for 4 years?
c) What is the stock price at the end of year 3?
Transcribed Image Text:A financial analyst estimates that the current risk-free rate for NN company is 6.25 percent, the market risk premium is 5 percent, and NN's beta is 1.75. The current earnings per share (EPS0) is RM2.50. The company has a 40 percent payout ratio. The analyst estimates that the company's dividend will grow at a rate of 25 percent this year, 20 percent next year, and 15 percent the following year. After three years the dividend is expected to grow at a constant rate of 7 percent a year. The company is expected to maintain its current payout ratio. The analyst believes that the stock is fairly priced. a) What is the required rate of return for the stock? b) What are the dividends for 4 years? c) What is the stock price at the end of year 3?
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