Philly Corp's stock recently paid a dividend of $2 per share (Do = $2), and the stock is in equilibrium. The company has a constant growth rate of 5% and a beta of 1.5. The required rate of return on the market is 15%, and the risk free rate is 7%. Philly is thinking of making a chance that will increase its beta coefficient to 1.75. If market conditions remain unchanged, what new constant growth rate will cause the common stock price of Philly to remain unchanged?
Dividend expected after 1 year=D1=D0*(1+g)=2*(1+5%)=$2.10
CAPM model gives
Solution describes the steps to calculate price of stock. It also calculates the constant growth rate which will keep the price estimate same even if beta is revised.