Berg Inc. has just paid a dividend of $2.00. Its stock is now selling for $48 per share. The firm is half as risky as the market. The expected return on the market is 14 percent, and the yield on U.S. Treasury bonds is 11 percent. If the market is in equilibrium, what rate of growth is expected?

Question

Quizplus · Accepted Answer

The expected return on the stock can be calculated using the Capital Asset Pricing Model (CAPM): Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). Since the firm is half as risky as the market, Beta = 0.5. Therefore, Expected Return = 11% + 0.5 * (14% - 11%) = 12.5%. Using the Gordon Growth Model: Price = Dividend / (Expected Return - Growth Rate), we solve for the growth rate: $48 = $2 / (12.5% - Growth Rate), which gives a growth rate of 8%.

Berg Inc Has Just Paid a Dividend of $2