Explore BrainMass

Explore BrainMass

    Estimate the expected returns

    Not what you're looking for? Search our solutions OR ask your own Custom question.

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

    A magazine gave the following estimates for a firm:

    Beta= 1.15

    Dividend per share at date zero= $3.10

    Expected Dividend per share in three years from zero= $4.10

    Retention rate in three years from zero= 60%

    ROE in three years from zero= 15%

    The stock was selling for $49. Estimate the expected returns from purchasing at $49 and receiving the dividend stream projected by the magazine.

    Also, the risk-free rate was 11.5%. Using a market risk premium of 6%, what can I conclude about the purchase of the company's shares?

    © BrainMass Inc. brainmass.com December 24, 2021, 4:55 pm ad1c9bdddf

    Solution Preview

    Please refer to the attachment.

    The required rate of return is k = Rf+ Beta*Rm=11.5+1.15*6= 18.4%
    The growth ratio is g = Retention rate * ROE = 60%*15% =9% in 3 years
    Since we don't know how much can we sell the bond 3 years ...

    Solution Summary

    The expert estimates the expected returns.