Question

The risk-free rate of return is 5%, the required rate of return on the market is 15%, and High-Flyer stock has a beta coefficient of 1.4. If the dividend per share expected during the coming year, D1, is $3.92 and = 5%, at what price should a share sell?

Answer 1

$28

Step-by-step explanation:

Calculation to determine at what price should a share sell

First step is calculate the Required return using this formula

Required return=Risk free rate+Beta*(market rate-risk free rate)

Let plug in the formula

Required return=5+1.4*(15-5)

Required return=5+1.4*(10)

Required return=5+14

Required return=19%

Now let determine the Current price using this formula

Current price=D1/(Required return-Growth rate)

Let plug in the formula

Current price=3.92/(0.19-0.05)

Current price=3.92/0.14

Current price=$28

Therefore the price that a share sell is $28