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The risk-free rate of return is 5%, the required rate of return on the market is 11%, and high-flyer stock has a beta coefficient of 1.5. if the dividend per share expected during the coming year, d1, is $4.45 and g = 4%, at what price should a share sell?

Respuesta :

Louli
First step is to calculate the required equity return (Re) which is the minimum percentage of annual income from a certain investment that encourages individual to put money into this investment.

We will use the CAMP method to calculate the Re:
Re = risk free rate% + beta coefficient (required rate of return on market - risk free rate of return%) = 5% + 1.5(11%-5%) = 14%  
 
 The second step is to use the dividend growth model to calculate the stock value (V) where:
V = dividend per share(1+g) / (Re-g)
   = 4.45(1+4%) / (14%-4%)
   = 2.225$                                     

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