Ceejay Corporation's stock is currently selling at an equilibrium price of $30 per share. The firm has been experiencing a 6 percent annual growth rate. Last year's earnings per share, Eo, were $4.00 and the dividend payout ratio is 40%. The risk-free rate is 8%, and the market risk premium is 5%. If the market risk (beta) increases by 50%, and all other factors remain constant, what will be the new stock price? (Use 4 decimal places in calculations.)
Answer : D) $22.69
We will first calculate the required rate of return r
dividend payout ratio = 40%
Therefore Div0= $1.60 =40%*4
annual growth rate=g= 6%
Therefore Div1= next year's dividend= $1.6960 =(1+6%)*1.6
From the dividend capitalization model the price of share P0 is given by
Po= Div1/ (r-g)
Div1 = $1.6960 = dividend in year 1
The solution calculates stock price using CAPM and Dividend Discount Model
Stock price using CAPM and Dividend Discount Model..
Stock price at the end of the year.
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The beta of a stock is 1.2 and at the beginning of the year is selling for $55. The expected rate of return on the market portfolio is 9%, while the risk free rate of return is 3%. The stock is expected to pay a dividend of $2 at the end of the year. If the capital market is in CAPM equilibrium, what do you expect the price of the stock to be at the end of the year?View Full Posting Details