Question

A stock with a beta of 0.6 just paid a dividend of $5.60 and is priced at $324.00. If the risk-free rate is 2% and the market risk premium is 6%, what is the expected growth rate for the stock

Answer 1

Answer:Expected growth rate = 3.81%

Step-by-step explanation:

Following the CAPM model formulae. we have that

Expected Return = Risk free rate + Beta x Market premium

Expected Return= 2% + 0.6 X 6%

Expected Return= 0.02 + 0.6 X 0.06

Expected Return=0.02 + 0.036

= 0.056

where

Ke = Expected Return = 0.056

g = Growth rate =?

D0= dividend = 5.60

We have Market price of stock = D₀ (1+g)/ Ke -g

$324= 5.60 ( 1+g)/ 0.056 - g

324( 0.056-g) = 5.60 (1+ g)

18.144 -324g= 5.60 +5.60g

18.144 -5.60 = 5.60 g + 324g

12.544=329.6

g= 12.544/329.6 = 0.0381

Therefore Expected growth rate = 3.81%