Question

A share of BAC common stock has just paid a dividend of $1.00. The market return is 12% and the beta is 1.5. The three month T-bill rate is 4%. The expected long-run growth rate for this stock is 8%. What is the required return for the stock? What is the stock price?

Answer 1

Required rate of return= 16%

Stock price= $13.50

Step-by-step explanation:

A share of BAC common stock just made a dividend payment of $1

Market return is 12%

Beta is 1.5

Risk-free rate is 4%

Growth rate is 8%

The required rate of return for the stock can be calculated as follows

Required rate of return= Risk-free rate+beta×(market rate-risk-free rate)

= 4%+1.5(12%-4%)

= 4%+1.5×8%

= 4%+12

= 16%

The stock price can be calculated as follows

Stock price= dividend for the year/(rate of return-growth rate)

= (1×1.08)/(16/100-8/100)

= 1.08/0.16-0.08

= 1.08/0.08

= $13.50

Hence the required rate of return and the stock price is 16% and $13.50 respectively.