Please help! (1) Company A just paid a $3.00 dividend per share. The dividend is
ID: 1181740 • Letter: P
Question
Please help!
(1) Company A just paid a $3.00 dividend per share. The dividend is expected to grow at a 4% rate
indefinitely. The beta of the stock of Company A is 1.5. The market risk premium is 8% and the
risk-free rate is 3%.
(a) What is the expected return on the equity?
(b) What is the capitalization rate?
(c) What will be the dividend next year?
(d) What is the intrinsic value of the stock?
(e) If the stock is currently trading at $30, is the stock overpriced or underpriced?
(f) Would you buy or sell the stock?
Explanation / Answer
a)
return on requity = rf + market risk premium * beta = 3 + ( 8*1.5 ) = 15 %
b) copitalization rate = [D*(1+g) / ( market rate ) ] + g = (3*(1+0.04) / 8) + 4 = 4.39 %
c)) diveident rate = D*(1+g) = (3*(1+0.04)) = 3.12 %
d) intrinsic value = D1 / (r-g) = 3.12 / (0.15 - 0.04) = $ 28.3636
e) so. as intrinsic value < trading value .... the stock is overpriced
f) so... sellthe stock