Explore BrainMass

Explore BrainMass

    McNally Motors: Expected Future Stock Price

    Not what you're looking for? Search our solutions OR ask your own Custom question.

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

    McNally Motors has yet to pay a dividend on its common stock. However, the company expects to pay a $1.00 dividend starting two years from now (i.e., D2 = $1.00). Thereafter, the stock's dividend is expected to grow at a constant rate of 5 percent a year. The stock's beta is 1.4, the risk-free rate is kRF = 0.06, and the expected market return is kM = 0.12.

    What is the stock's expected price four years from now?

    © BrainMass Inc. brainmass.com March 4, 2021, 6:22 pm ad1c9bdddf

    Solution Preview

    At the end of one year the expected payout is = kRF + Beta(kM - kRF).

    So, substituting the figures we have Expected payout at the end of first year = 0.06 + 1.4(0.12 -0.06) = 0.144. That is if the stock had a par value of 1.00$ it would be worth ...

    Solution Summary

    The solution presents the calculations and clearly explains how the answer is derived.