A magazine gave the following estimates for a firm:
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?
Please refer to the attachment.
<br>The required rate of return is k = Rf+ Beta*Rm=11.5+1.15*6= 18.4%
<br>The growth ratio is g = Retention rate * ROE = 60%*15% =9% in 3 years
<br>Since we don't know how much can we sell the bond 3 years ...