Question
You note that a stock can currently be purchased at $40. You also note that the stock has a current dividend of $2.20 and usually
You note that a stock can currently be purchased at $40. You also note that the stock has a current dividend of $2.20 and usually increases the dividend by 7% per year. Given the level of risk you anticipate for this stock you would have a required return of 12%. Doing further research indicates this stock has a 5 year beta of 1.2. The 10 year treasury bonds are trading at 2.3% and the return on the market has been about 10% historically a) Based on the above information would you purchase this stock (prove your analysis and tell me why or why not) (10 marks) b) If your analysis is correct, what do you feel would be the correct price for this stock? (5 marks) c) If this is correct, where should the stock be in relation to the Security Market Line (SML)
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