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Value of stock

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A company paid a dividend of $1.20 for 2006 and has a beta of 1.2. It is expected to increase its dividend at an 8% annual rate for the foreseeable future. The expected return for the market (portfolio) is 14% and the risk-free rate is 5%.
a) Using the Capital Asset Pricing Model, what is the stock's value?

b) If the company's earnings multiple is 20 and it is expected to earn $2.50 per share next year while paying a dividend of $1.25 per share, what value should you place on a share of its stock?

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Solution Preview

a) Using the Capital Asset Pricing Model, what is the stock's value?

CAPM (Capital Asset Pricing Model equation is:
r A= r f + beta A (r m - r f)

risk free rate= r f = 5%
beta of stock= beta A= 1.2
return on market ...

Solution Summary

The solution calculates the value of stock.

$2.19