Question

A stock that currently trades for $40 per share is expected to pay a year-end dividend of $2 per share. The dividend is expected to grow at a constant rate over time. The stock has a beta of 1.2, the risk-free rate is 5 percent, and the market risk premium is 5 percent. What is the stock’s expected price seven years from today?

Answer 1

$k=R(f)+\beta * Risk premium$

k-the rate of yield

R(f)-the risk-free rate

$k=0.05+1.2*0.05=0.11$

$P=DPS*(1+g)/(k-g)$

P-price of stock

DPS-Dividends Per Share

g-expected growth

$40=2*(1+g)/(0.11-g)$

$2.2-20g=1+g$

$1.2=21g$

$g=0.057$

P₇=2*1.057^7/0.11=26.8