Suppose that you come up with the following dividend forecasts for the next three years:  

Year
Expected Dividend
1
$1.00
2
$2.00
3
$2.50

After the third year, the dividends are anticipated to maintain a 5 percent growth rate, forever. The required return is 10 percent. What is the value of the stock today?

(b) Stock Y has a beta of 1.50 and an expected return of 16 percent. Stock Z has a beta of .70 and an expected return of 11.5 percent. If the risk-free rate is 5.5 percent and the market risk premium is 8 percent.  

 
i. Are these stocks correctly priced?

ii. If not, what would the risk-free rate have to be for the two stocks to be correctly priced relative to each other?

Answer rating: 100% (QA)

a To calculate the value of the stock today we need to find the present value of all future dividends and the terminal value The terminal value is the ... View the full answer