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Calculating how much should be paid for a stock

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Anybody Coal Co. expects tough economic conditions for the foreseeable future. Their current beta is 1.2, the risk-free rate is 10% and the required rate of return on the market is 15%. Anybody paid a dividend of $4 today. Analysts are predicting a steady decline of 6% per year in dividends for the foreseeable future. What is the most you would be willing to pay for this stock?

a) $0
b) $42.40
c) $44.94
d) $17.09
e) $25.00

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Solution Summary

The solution walks through the steps of calculating the price of the stock very clearly and concisely. The solution is in a very well-written format which makes it easy for any student to understand the process and the steps. Overall, an excellent response.

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First, calculate the expected return on the stock

Let Ea= expected return on stock
Rf = risk free rate
Rm = market return
Ba = beta of stock

Ea = Rf ...

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