Question

Prudential is expected to pay an annual $1.25 dividend in the coming year. Dividends are expected to grow at the rate of 4% per year. The risk free rate is 2% and the market risk premium is 5%. Prudential has a beta of 0.8. The value of the stock should be:

Answer 1

Answer:

$62.5

Explanation:

The value of the stock = dividend to be paid next year / required rate of return - growth rate

required rate of return = risk free rate + (risk premium x beta)

2% + (0.8 x 5%) = 6%

1.25 /6% - 4% = 1.25 / 0.06 - 0.04 = $62.5