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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
    https://brainmass.com/business/finance/stock-value-today-using-the-beta-and-growth-rate-30874

    SOLUTION This solution is FREE courtesy of BrainMass!

    Answer: 41.41

    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>
    https://brainmass.com/business/finance/stock-value-today-using-the-beta-and-growth-rate-30874

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