Company C's stock has beta 1

Finance Dec 22, 2020

Company C's stock has beta 1.2, the risk-free rate is 6%, and the market return is 11%, what will be the stock's required rate of return using the Capital Asset Pricing Model (CAPM)? The Company C's has just paid a dividend per share of $2. Find the price of the company C's stock when the dividend growth rates are: a. 0% b. 5%

Expert Solution

1.Required return=risk free rate+beta*(market rate-risk free rate)

=6+(11-6)*1.2

=12%

2.a.Current price=D1/(Required return-Growth rate)

=(2/0.12)

=$16.67(Approx)

2.b.Current price=D1/(Required return-Growth rate)

=(2*1.05)/(0.12-0.05)

=$30

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