The risk-free rate of return, is 6%; the expected rate of return on the market i

Question

The risk-free rate of return, is 6%; the expected rate of return on the market is 13%; Company Z%u2019s common stock has a beta coefficient of 1.8. If the dividend expected during the coming year, D1, is $2.35, and if dividends are expected to increase at an annual rate of g = 5%, at what price would Company Z%u2019s stock sell? Answer $14.50 $17.28 $ 9.63 $19.35 $21.24 $13.65 The risk-free rate of return, is 6%; the expected rate of return on the market is 13%; Company Z%u2019s common stock has a beta coefficient of 1.8. If the dividend expected during the coming year, D1, is $2.35, and if dividends are expected to increase at an annual rate of g = 5%, at what price would Company Z%u2019s stock sell? The risk-free rate of return, is 6%; the expected rate of return on the market is 13%; Company Z%u2019s common stock has a beta coefficient of 1.8. If the dividend expected during the coming year, D1, is $2.35, and if dividends are expected to increase at an annual rate of g = 5%, at what price would Company Z%u2019s stock sell? $14.50 $17.28 $ 9.63 $19.35 $21.24 $13.65 $14.50 $17.28 $ 9.63 $19.35 $21.24 $13.65

Explanation / Answer

Hi,

Please find the answer as follows:

Expected Return on the Stock (Ke) = Rf + B(Rm - Rf) = 6 + 1.8*(13 - 6) = 18.6%

Stock Price = D1/(Ke - g) = 2.35/(.186 - .05) = 17.28

Answer is 17.28

Thanks.

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