?What is the value of a common stock if a. the firm's earnings and dividends are growing annually at 4 percent, the current dividend is $1.32, and investors require a 8 percent return on investments in common stock? ? b. What is the value of this stock if you add risk to the analysis and the firm's beta coefficient is 0.8, the risk-free rate is 1.5 percent, and the return on the market is 8.5 percent? ? c. If the price of the stock is $35, what is the rate of return offered by the stock? Should the investor acquire this stock?
What will be an ideal response?
a. V = $1.32(1 + .04) = $27.46 .09 - .04?b. k = .015 + (.085 - .015).8 = .068 = 6.8%? V = $1.32(1 + .04) = $49.03 .068 - .04?c. r = $1.32(1 + .04)/$35 + .04 = 7.92%?The rate of return is less than the required rate (14.15% versus 15%) until the risk adjustment is made. After this adjustment, the expected rate of return exceeds the required rate of return (14.15% versus 13.8%); therefore, buy the stock.
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