The risk-free rate is 4%; the market risk premium is 7%

Finance Sep 13, 2020

The risk-free rate is 4%; the market risk premium is 7%. PPR Company's stock has a beta of 2. The last dividend was $4. The dividend is expected to grow at 6%. What is the expected price in four years?

Expert Solution

Computation of the expected price in four years:-

Required return = Risk-free rate + (Beta * Market risk premium)

= 4% + (2 * 7%)

= 4% + 14%

= 18%

Current stock price (P0) = D1 / (Required return - Growth rate)

= $4 * (1 + 6%) / (18% - 6%)

= $4.24 / 12%

= $35.33

Price in four years (P4) = Current stock price * (1 + Growth rate)^n

= $35.33 * (1 + 6%)^4

= $35.33 * 1.2625

= $44.61

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