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# Stock Value Today Using the Beta and Growth Rate

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Next year's dividend for ERT stock is expected to be \$4.00. You expect it to be \$4.00 in 2 years, also, but then you expect it to grow at an 8% annual rate forever. If the risk-free rate of interest is 1%, the expected market return is 9%, and the ERT's beta is 2.0 then what is the price of the stock, today?

© BrainMass Inc. brainmass.com September 26, 2022, 6:43 pm ad1c9bdddf

## SOLUTION This solution is FREE courtesy of BrainMass!

First calculate the required rate of return r

r = r f + beta (r m - r f)

r f = 1%
beta A= 2
r m = 9%
r = ?
Plugging in the values
r = 17. %

Next find the price of the stock at end of year 2

P2= Div3/ (r-g)

Div3 = 4.32 =4*(1+8%)
r= 17. %
g= 8%
P2= ?
Plugging in the values
P2= 48

Next we discount P2 and D1 and D2 to year 0 to get the current stock price

PV factor @ 17% Discounted value
D1= 4 0.8547 3.42
D2= 4 0.7305 2.92
P2= 48 0.7305 35.06
41.40

Therefore current stock price= \$41.40

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

© BrainMass Inc. brainmass.com September 26, 2022, 6:43 pm ad1c9bdddf>