VR-X issued 100,000 common stocks at par value of $12 to expand its business 3 years ago specialized in interior design services. The company has just paid a dividend of $2 per share and predicts for dividend cuts because of the coronavirus pandemic. The dividends are expected to decrease at an annual rate of 20 percent for the next two years. Afterwards, the company is confident that the dividend will be in rebound and stabilize at a constant growth rate of 8 percent in the foreseeable future.

VR-X’s common stock has a beta of 1.25. The risk-free rate is 4 percent and the market risk premium is 7 percent.

(a) Calculate the required return on VR-X common stock based on capital pricing model. (CAPM)

(b) Calculate the dividend amounts in 1, 2 and 3 years respectively (D1, D2 and D3).

(c) Based on parts (a) and (b), calculate the current common stock price.

(please show me steps and round the final answer to 2 decimal places, thanks)

Answer rating: 100% (QA)

a Calculate the required return on VRX common stock based on Capital Asset Pricing Mo... View the full answer