Question

The risk-free rate of return is 4%, the expected rate of return of the market is 10%, and High-Flyer stock has a beta coefficient of 1.4. If the dividend per share expected during the coming year, D1, is $4.00 and g = 6%, at what price should a share sell?

Answer 1

$62.50

Step-by-step explanation:

The computation of the price that a share sell is shown below:

The Required rate of return is

= Risk free rate + Beta × (Market rate of return - Risk free rate of return)

= 4% + 1.4 × (10%-4%)

= 12.4%

Now

Price of the share is

= expected dividend of next year ÷ (Required rate of return - Growth rate)

= D1 ÷ (ke - g)

= $4 ÷ (0.124 - 0.06)

= $62.50