mmon stocK has (-free rate is 4 percent an market risk prem 7 регcent. EQUIRED Calculate the required return on VR-X common stock based on capital asset pricing me (САРМ). Calculate the dividend amounts in 1, 2 and 3 years respectively (D1, D2 and D3).

EBK CONTEMPORARY FINANCIAL MANAGEMENT
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Author:MOYER
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Chapter7: Common Stock: Characteristics, Valuation, And Issuance
Section: Chapter Questions
Problem 9P
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VR-X issued 100,000 common stocks at par value of $12 to expand its business 3 years ago
specialized in interior design services. The company has just paid a dividend of $2 per share and
predicts for dividend cuts because of the coronavirus pandemic. The dividends are expected to
decrease at an annual rate of 20 percent for the next two years. Afterwards, the company is confident
that the dividend will be in rebound and stabilize at a constant growth rate of 8 percent in the
foreseeable future.
VR-X's common stock has a beta of 1.25. The risk-free rate is 4 percent and the market risk premium
is 7 percent.
REQUIRED
(a) Calculate the required return on VR-X common stock based on capital asset pricing model
(САРМ).
(b) Calculate the dividend amounts in 1, 2 and 3 years respectively (Dı, D2 and D3).
(c) Based on parts (a) and (b), calculate the current common stock price.
Transcribed Image Text:VR-X issued 100,000 common stocks at par value of $12 to expand its business 3 years ago specialized in interior design services. The company has just paid a dividend of $2 per share and predicts for dividend cuts because of the coronavirus pandemic. The dividends are expected to decrease at an annual rate of 20 percent for the next two years. Afterwards, the company is confident that the dividend will be in rebound and stabilize at a constant growth rate of 8 percent in the foreseeable future. VR-X's common stock has a beta of 1.25. The risk-free rate is 4 percent and the market risk premium is 7 percent. REQUIRED (a) Calculate the required return on VR-X common stock based on capital asset pricing model (САРМ). (b) Calculate the dividend amounts in 1, 2 and 3 years respectively (Dı, D2 and D3). (c) Based on parts (a) and (b), calculate the current common stock price.
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