If the risk-free rate is 7%, the return on the market portfolio is 15%, and the beta is 1.5, what is the value of the stock if the current dividend (D₀) is $1.20 and it is expected to grow at a constant rate of 6% per year?

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Quizplus · Accepted Answer

The required rate of return can be calculated using the CAPM formula: Required return = Risk-free rate + Beta * (Market return - Risk-free rate) = 7% + 1.5 * (15% - 7%) = 19%. The stock price can be calculated using the Gordon Growth Model: P = D1 / (r - g) = 1.20 * (1 + 0.06) / (0.19 - 0.06) = $9.80.

If the Risk-Free Rate Is 7%, the Return on the Market