Question
9) A company that you are interested in has an ROE of 20%. Its dividend payout ratio is 60%. The last dividend, that was just
9) A company that you are interested in has an ROE of 20%. Its dividend payout ratio is 60%. The last dividend, that was just paid, was $2.00 and the dividends are expected to grow at the same current rate indefinitely. Company's stock has a beta of 1.8, risk-free rate is 5%, and the market risk premium is 10%. a) Calculate the expected growth rate of dividends using the ROE and the retention ratio. b) Calculate investors' required rate of return according to CAPM. c) Based on your estimations above, how much would you be willing to pay for this stock? 10) ABC preferred stock is trading for $52 on the market and it pays an annual dividend of $4.20 per share. a) What is the expected rate of return on the stock? bv) If your required rate of return is 9%, how much is this stock worth to you? c) Considering your required rate of return from part b, does this stock seem like a desirable investment? Explain why or why not.
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