3. Stock Valuation

A companys stock just paid a dividend (D0) of $3.50 and the stocks dividends are expected to grow at a constant rate of 4.0% per year. The stock has a beta of 1.2, the risk-free rate is 2%, and the market risk premium is 7%.

a. Is this stock more or less risky than the market? Why?

b. Use the CAPM to compute the cost of equity/required return for the stock (rs)?

c. Use the constant-growth dividend discount model (DDM) to estimate what the price of the stock should be.

d. If you see that this stock is selling for $45.00, would you buy it? Why?