Explore BrainMass

Explore BrainMass

    Value of stock

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    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?

    © BrainMass Inc. brainmass.com June 3, 2020, 7:58 pm ad1c9bdddf
    https://brainmass.com/business/capital-asset-pricing-model/value-of-stock-118651

    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

    ADVERTISEMENT