Question

Check my work The risk-free rate of return is 4%, the required rate of return on the market is 10%, and High-Flyer stock has a beta coefficient of 2.0. If the dividend per share expected during the coming year, D4, is $3.30 and g = 5%, at what price should a share sell? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Share price

Answer 1

Required rate of return = Risk free rate + [ Beta * ( Market rate of return - Risk free rate ) ] = 4% + [ 2.0 * ( 10% - 4% ) ]

16%

P0 = D1 / ( r - g )
Here,
P0 = Current value of stock
D1 = Next dividend = 3.30
g = Growth rate = 5%
r = Required rate of return = 16%
Now let us put these figures in the above equation to find out required return.
P0 = 3.30 / ( 16% - 5% )	30.00