Berg Inc.has just paid a dividend of $2.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%,and the yield on U.S.Treasury bonds is 11%.If the market is in equilibrium,what rate of growth is expected?

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Quizplus · Accepted Answer

Step 1 - Calculate the required rate of return using CAPM. k_e = k_F + β(k_M - k_F ) k_e= .11 + .5(.14 - .11) k_e = 12.5% Step 2 - Calculate the growth rate by using the Gordon Model. 11ea7fdb_fbf7_fcaf_a768_3fa9b0abeec9_TB2902_11 = 11ea7fdb_fbf7_fcb0_a768_2f55c572064f_TB2902_11 48 = 11ea7fdb_fbf7_fcb1_a768_33d13b4c83f5_TB2902_11 6 - 48g = 2 × (1 + g) 6 - 48g = 2 + 2g 4 = 50g g = 8%

Berg IncHas Just Paid a Dividend of $2