GHy has just paid a dividend of $6.21 per year. George looks up the value of GHY stock and feels that the dividend will increase 5% next year and then the growth rate will fall to 2.33% where it will remain stable forever. He looks up the value of the Beta for the company and finds that it is 0.95. 10-year government bonds are currently paying 2% and he feels that the market risk premium is 5%. 

a) What is the appropriate discount rate for GHY?

b) What does he estimate the value of the stock to be?

c) Suppose the stock is selling for $115. What decision should he take and why?

Answer rating: 100% (QA)

To calculate the appropriate discount rate for GHY George needs to use the Capital Asset Pricing Mod... View the full answer