A stock you are interested in paid a dividend of $1 last year. The anticipated growth rate in dividends and earnings is 20% for the next 2 years before settling down to a constant 5% growth rate. The discount rate is 10%.
Calculate the expected price of the stock.© BrainMass Inc. brainmass.com October 24, 2018, 7:46 pm ad1c9bdddf
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Calculate the market price of a stock in the given scenario.
The risk-free rate of return is 3 percent, and the expected return on the market is 8.7 percent. Stock A has a beta coefficient of 1.4, an earnings and dividend growth rate of 5 percent, and a current dividend of $2.60 a share.
A) What should be the market price of the stock?
B) If the current market price of the stock is $27, what should you do?
C) If the expected return on the market rises to 10 percent and the other variables remain constant, what will be the value of the stock?
D) If the risk-free return rises to 4.5 percent and the return on the market rises to 10.2 percent, what will be the value of the stock?
E) If the beta coefficient falls to 1.1 and the other variables remain constant, what will be the value of the stock?
F) Explain why the stock's value changes in c through e?