Berg Inc.has just paid a dividend of R2.00.Its shares is now selling for R48 per share.The firm is half as risky as the market.The expected return on the market is 14 percent, and the yield on S.A.Treasury bonds is 11 percent.If the market is in equilibrium, what rate of growth is expected?

Question

Quizplus · Accepted Answer

To calculate the expected rate of return, we can use the following formula:

E(R) = Rf + β[E(Rm) - Rf]

where:
Rf = risk-free rate = 11%
β = beta = 0.5
E(Rm) = expected return on the market = 14%

Plugging in the values, we get:

E(R) = 0.11 + 0.5(0.14 - 0.11)
E(R) = 0.11 + 0.015
E(R) = 0.125 or 12.5%

Now, to calculate the expected rate of growth, we can use the dividend growth model:

P0 = D1 / (r - g)

where:
P0 = current stock price = R48
D1 = expected dividend next year = R2
r = required rate of return = E(R) = 12.5%
g = expected rate of growth

Plugging in the values, we get:

48 = 2 / (0.125 - g)
48(0.125 - g) = 2
6 - 48g = 2
-48g = -4
g = 0.08 or 8%

Therefore, the expected rate of growth is 8%. Answer choice D is correct.

Berg IncHas Just Paid a Dividend of R2