Question #76

Reading: Reading 20 Discounted Dividend Valuation

PDF File: Reading 20 Discounted Dividend Valuation.pdf

Page: 29

Status: Unattempted

Part of Context Group: Q76-80 First in Group
Shared Context
- What is the beta implied by a market price of $40.38? A) 1.02. B) 1.20. C) 1.16.
Question
Based on CAPM and the Gordon growth model, what is the value of the UC stock if the firm's retention ratio is 0.7, its tax rate is 40%, and its beta is 1.12?
Answer Choices:
A. $9.72
B. $20.79
C. $44.49
Explanation
From CAPM: r = 0.03 + (0.09 − 0.03) r = 0.03 + 1.12(0.06) r = 0.0972 V0 = D1 / (r − g) = 2.00(1 + 0.05) / (0.0972 − 0.05) = 2.10 / 0.0472 = $44.49
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