Risk Free Rate - Equity Investments next, stock, elements, following, understand

johnnyBuz

(RFR - MR) is the market premium, which in the problem is 5%, same as the RFR (a coincidence).

dotamasta

I dun get this question. Isn't it the formula to calculate P0 is "P0 = D1/(K-G)"? Where is the growth?

dece2011

it's not the infinite dividend model which is why there is no growth

thanks Starbuk!

RobertA

whcih equation is this that the ke is devidend discounted back plus the value discounted back? how is it derived? i cant fint the formula anywhere, can only find the infinite divident formula.

sabina

Can someone please help me understand this question - when you are calculating K, why do you just use 5% (risk free rate), I thought the formula for K was RFR + B(RFR - MR)

A stock has the following elements: last year’s dividend = $1, next year’s dividend is 10% higher, the price will be $25 at year-end, the risk-free rate is 5%, the market premium is 5%, and the stock’s beta is 1.2.

What will be the current price of the stock with a beta of 1.5?

A) $23.20.
B) $23.51.
C) $20.23.

The correct answer is A) $23.20.

k = 5 + 1.5(5) = 12.5%
P0 = (1.1 / 1.125) + (25 / 1.125) = $23.20

Finalnub

Ohh alrite. Now i got it! Thanks starbuk!

draz

that is just getting the present value of a future cash flow. you will do this when you are given a price and also able to derive the dividend in the future, so you just discount them back to today to get the present value (price of stock today that you would pay based on your Ke).