Assume a major investment service has just given Oasis Electronics its highest i

Question

Assume a major investment service has just given Oasis Electronics its highest investment rating, along with a strong buy recommendation. As a result, you decide to take a look for yourself and to place a value on the company's stock. Here's what you find. This year, Oasis paid its stockholders are annual dividend of 3.71 dollars a share, but because of its high rate of growth in earnings, its dividend are expected to grow at the rate of 12 percent a year for the next 4 years and then to level out at 8 percent a year. So far, you've learned that the stock has a beta of 1.71, the risk-free rate of return is 5 percent and then expected return on the market is 11 percent Using the CAPM to find the required of rate of return put value on this stock Using the CAPM, the required rate of return on the investment is

Explanation / Answer

Risk free rate = 5%

Market rate = 11%

Beta = 1.71

Cost of equity ass per CAPM = 5+1.71(11-5) = 15.26%

Present Value of share at 5th year = 6.81/(.1526-.08) = 93.80 * 0.4916 = 46.11

Add to the above value the present values of dividendscalculated below

The price of the share now will be = 46.11+3.61+3.5+3.4+3.31+3.1 = 63.03

Year Dividend PV at 15.26% PV of dividend 1 4.16 0.86760368 3.61 2 4.65 0.75273614 3.50 3 5.21 0.65307665 3.40 4 5.84 0.5666117 3.31 5 6.30 0.4915944 3.10

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