The common stock issued by Anderson Enterprises currently has a beta of 1.5; the
ID: 2632697 • Letter: T
Question
The common stock issued by Anderson Enterprises currently has a beta of 1.5; the risk-free rate (R F) is an annual rate of 5%; and the market return (r m) is an annual rate of 13%. Using the a Security Market Line (SML) equation, calculate the required rate of return on this stock. a. Now, assume that the stock is expected to generate a dividend during the coming year (D1) of $5.10 per share. Dividends are expected to continue to grow thereafter at a constant rate of 2%. Using the required rate of return for this stock, which you calculated above, and the Gordon constant growth stock model, calculate the new equilibrium stock price per share.
Explanation / Answer
a)
required rate of return = 5% + 1.5 * (13%-5%)
= 17%
b)
price per share = 5.1/17%-2%
= 34