# Stock Value Today Using the Beta and Growth Rate

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?

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## 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

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