question archive An analyst gathers the following data to determine the attractiveness of a company's common stock: Dividends per share in 2007: $2 Dividends per share in 2013: $3 Expected return on the market: 17% Expected nominal risk-free return: 9% Stock's beta: 1
An analyst gathers the following data to determine the attractiveness of a company's common stock: Dividends per share in 2007: $2 Dividends per share in 2013: $3 Expected return on the market: 17% Expected nominal risk-free return: 9% Stock's beta: 1
Subject:FinancePrice:2.87 Bought7
An analyst gathers the following data to determine the attractiveness of a company's common stock:
Dividends per share in 2007: $2
Dividends per share in 2013: $3
Expected return on the market: 17%
Expected nominal risk-free return: 9%
Stock's beta: 1.8
Stock's market price as of the end of December 2013: $19
Using the Dividend Discount Model, the stock's intrinsic value in 2006 is closest to:
(All years are end of years)
a) None of these answers is correct
b)$6.67
c)$4.36
d)$5.84
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Answer:
| Share price is the PV of Cash flows discounted at required return | |
| As per CAPM, Cost of Equity = Rf + (Rm - RF) * Beta | |
| Cost of Equity = 9% + (17% - 9%) * 1.8 | |
| Cost of Equity = 23.4% | |
| 170 | |
| Share Price = (Dividend in 2007 / (1+r)) + (Dividend in 2013 / (1+r)^7) + (Stock Price in 2013 / (1+r)^7) | |
| Share Price = (2 / (1+23.4%)) + (3/ (1+23.4%)^7) + (19/ (1+23.4%)^7) | |
| Share Price = $6.67 | |
| Option B is correct |
