Tangshan Antiques has a beta of 1.40, the annual risk-free rate of interest is currently 10 percent, and the required return on the market portfolio is 16 percent
The firm estimates that its future dividends will continue to increase at an annual compound rate consistent with that experienced over the 2010-2013 period.
(a) Estimate the value of Tangshan Antiques stock.
(b) A lawsuit has been filed against the company by a competitor in 2013, and the potential loss has increased risk, which is reflected in the company's beta, increasing it to 1.6. What is the estimated price of the stock following the filing of the lawsuit in 2013?
(a) rs = 0.10 + 1.4(0.16 - 0.10 ) = 0.184
growth rate of dividends = ($3.40/$2.70 )1/3-1 = 8%
P0 = $3.40(1.08 )/(0.184 - 0.08 ) = $35.31
(b) rs = 0.10 + 1.6(0.16 - 0.10 ) = 0.196
P0 = $3.40(1.08 )/(0.196 - 0.08 ) = $31.66
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