View the step-by-step solution to: Assume the beta coefficient for a company’s stock is β = 0.2,

This question was answered on Aug 09, 2012. View the Answer
Assume the beta coefficient for a company’s stock is β = 0.2, the risk-free rate of return, rRF, is 8% and the required rate of return on the market, rM, is 14%. Assume the dividend expected during the coming year is D1 = $2.50 and the growth rate is a constant 7%. Complete parts (a) through (c) below. a) Compute the price at which the company’s stock should sell. b) Find the new price of the stock assuming the risk-free rate of return is 5% and the required rate of return on the market is 11%. c) What would be needed for a stock to be in equilibrium?
Sign up to view the entire interaction

Dear Student Please find... View the full answer

Finance - 8332018.xls

SOLUTION:
a)

Ke = Rf + Beta * (Rm - Rf)
Ke = 8% + 0.2 * (14% - 8%)
Ke

9.20%

P = D / (Ke - g)
P = $2.50 / (9.20% - 7%)
P
b)

$113.64

Ke = Rf + Beta * (Rm - Rf)
Ke = 5% + 0.2 * (11% - 5%)
Ke...

Why Join Course Hero?

Course Hero has all the homework and study help you need to succeed! We’ve got course-specific notes, study guides, and practice tests along with expert tutors and customizable flashcards—available anywhere, anytime.

-

Educational Resources
  • -

    Study Documents

    Find the best study resources around, tagged to your specific courses. Share your own to gain free Course Hero access or to earn money with our Marketplace.

    Browse Documents
  • 890,990,898

    Question & Answers

    Get one-on-one homework help from our expert tutors—available online 24/7. Ask your own questions or browse existing Q&A threads. Satisfaction guaranteed!

    Ask a Question
  • 890,990,898

    Flashcards

    Browse existing sets or create your own using our digital flashcard system. A simple yet effective studying tool to help you earn the grade that you want!

    Browse Flashcards