You are considering an investment in the common stock of Remi's Sporting Goods. The stock is expected to pay a dividend of $1.80 a share at the end of the year (D1=1.80). The stock has a beta of 0.8. The risk-free rate is 4.5%, and the market expected return is 8.0%. The stock's dividend is expected to grow at some constant rate g. The stock currently sells for $24 a share. Assuming the market is in equilibrium, what does the market believe will be the stock price at the end of 4 years?
You are considering an investment in the common stock of Remi's Sporting Goods. The stock is expected to pay a dividend of $1.80 a share at the end of the year (D1=1.80). The stock has a beta of 0.8. The risk-free rate is 4.5%, and the market expected return is 8.0%. The stock's dividend is expected to grow at some constant rate g. The stock currently sells for $24 a share. Assuming the market is in equilibrium, what does the market believe will be the stock price at the end of 4 years?
Dividend in 1 year (D1) = 1.80
Beta = 0.8
Risk free rate = 4.5%
Market return = 8%
Dividend growth rate = g
Stock price = $24
Using CAPM model first calculate Expected return of stock as follows:
= 4.5% + ( 8% - 4.5%) *0.8
= 4.5% + 2.8%
= 7.3%
Here,
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