Question

Assume a major investment service has just given Big Lake Realty its highest investment rating, along with a strong buy recommendation. As a result, you decide to take a look for yourself and to place a value on the company's stock. Here's what you find: This year, Big Lake paid its stockholders an annual dividend of $5.43 a share, but because of its high rate of growth in earnings, its dividends are expected to grow at the rate of 9% a year for the next five years and then to level out at 6% a year. So far, you've learned that the stock has a beta of 1.17, the risk-free rate of return is 3.4%, and the expected return on the market is 10.9%. Using the CAPM to find the required rate of return, put a value on this stock. Using the CAPM, the required rate of return on the investment is 12.18 %. (Round to two decimal places.) The value of the company's stock is $ 148.82. (Round to the nearest cent.)

Answer 1

Required return = 12.18% 0.034+(1.17*(0.109-0.034))

present value factor of 12.18% Year 0.89146 0.79471 m Cash flows $5.92 $6.45 $7.03 $7.66 $8.35 $143.42 0.70845 Present value (cash flows x present value factor ] $5.28 $5.13 $4.98 $4.84 $4.70 $80.75 $105.68 in 0.63156 0.56301 0.56301 Price at year 5 (8.35*1.06)/(0.1218-0.06) Value of stock today