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Assume that company A has a beta coefficient of 1.2, that the risk free rate is 7.0 % and that the market risk premium is 5 percent. What is the required rate of return on the firm's stock?

Hi,
THese are pretty basic problems just need some guidance! Thanks!

1. Assume that company A has a beta coefficient of 1.2, that the risk free rate is 7.0 % and that the market risk premium is 5 percent. What is the required rate of return on the firm's stock?

2. Assume that company A is a constant growth company whose last dividend which was paid yesterday as $2.00 and whose dividend is expected to grow indefinitely at a 6% rate.

What is the firm's expected dividend stream over the next 3 years?
What is the firm's current stock price?
What is the stock's expected value 1 year from now?
What are the expected dividend yield, the capital gains yield and the total return during the 1st year?

Solution Preview

1.Assume that company A has a beta coefficient of 1.2, that the risk free rate is 7.0 % and that the market risk premium is 5 percent. What is the required rate of return on the firm's stock?
By CAPM, we know:
Rr = Rf + Beta * Risk Premium = 7% + 1.2*5% = 13%

2. Assume that ...

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