The stock KZ has an equity beta of 1.8. The market risk premium is 5% and the current  risk-free rate is 3%. The company is going to pay the following dividends for the next 4  years: $12 for year 1, $9 for year 2, $6 for year 3 and $2 for year 4. Afterwards, it would  maintain a 5% growth rate in dividends forever. (a) Determine the required rate of return for the stock. (b) Compute the maximum price you would pay for this stock today.

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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The stock KZ has an equity beta of 1.8. The market risk premium is 5% and the current 
risk-free rate is 3%. The company is going to pay the following dividends for the next 4 
years: $12 for year 1, $9 for year 2, $6 for year 3 and $2 for year 4. Afterwards, it would 
maintain a 5% growth rate in dividends forever.


(a) Determine the required rate of return for the stock.

(b) Compute the maximum price you would pay for this stock today.

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