Question #91
Reading: Reading 20 Discounted Dividend Valuation
PDF File: Reading 20 Discounted Dividend Valuation.pdf
Page: 35
Status: Unattempted
Question
IAM, Inc. has a current stock price of $40.00 and expects to pay a dividend in one year of $1.80. The dividend is expected to grow at a constant rate of 6% annually. IAM has a beta of 0.95, the market is expected to return 11%, and the risk-free rate of interest is 4%. The expected stock price two years from today is closest to:
Answer Choices:
A. $43.94
B. $43.49
C. $41.03
Explanation
(Module 20.2, LOS 20.c)
CAPM : r = 0.04 + [0.95 × (0.11 −0.04)] = 0.1065
D3 = D1 × (1 + g)2 = $1.80 × 1.062 = $2.0225
P2 =
=
= $43.49
D3
r −g
$2.0225
0.1065 −0.06