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A stock has the following data: o Current cash flow per share: $ 10 o Growth rate for the next three years: 30% o Long term growth rate after 3 years: 5% o It pays a dividend 20% of cash flow every year
A stock has the following data:
o Current cash flow per share: $ 10
o Growth rate for the next three years: 30%
o Long term growth rate after 3 years: 5%
o It pays a dividend 20% of cash flow every year.
o The current risk free rate= 1.62%; Return of the market = 15%
o The stock's beta = 1.5
Using the above data and CAPM to calculate its stock price.
Expert Solution
First we calculate Cost of Equity "Re" using CAPM:
Re = (Rf+(Beta*(RM-Rf)))
Here,
Risk free rate of return "Rf" = 1.62%
Market return "RM" = 15%
Stock beta = 1.5
Re = (1.62%+(1.5*(15%-1.62%)))
Re = 21.69%
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