Question

Happy Feet Shoe Co. paid a dividend of $5.73 on its common stock at the end of last year. This company's dividends are expected to grow at a constant rate of 2% indefinitely. If the firm's beta is 1.29, the risk free rate is 6, and the market risk premium is 17, what is the value per share of Happy Feet's stock

Answer 1

$23.43

Step-by-step explanation:

To calculate the value of the share, first we need to calculate the required rate of return

Capital asset pricing model measure the required return on an asset or investment. it is used to make decision for addition of specific investment in a well diversified portfolio.

Formula for CAPM

Expected return = Risk free rate + beta ( market risk premium )

Er = Rf +
`\beta` ( Mrp )

By placing values in the formula

Er = 6% + 1.29 ( 17% )

Er = 5% + 21.93%

Er = 26.93%

Dividend Valuation method is used to value the stock price of a company based on the dividend paid, its growth rate and rate of return. The price is calculated by calculating present value of future dividend payment.

Value of Share = Dividend ( 1+growth rate ) / (Rate of return - Growth rate)

P0 = D0 ( 1+g ) / (r - g )

By placing values in the formula

P0 = $5.73 ( 1+2% ) / (26.93% - 2% )

P0 = $5.84 / 24.93%

P0 = $23.43