The common stock of Scarlet Enterprises currently pays a quarterly dividend of $1.75 per share. The dividend is assumed to grow annually at a constant rate of 4.0%. The market beta for Scarlet Enterprises is 1.2. The market risk premium is 7.5% and the risk-free interest rate 1.5%. The market price of a share is $125.00.

(a)What is the required return for a share of common stock for Scarlet Enterprises?

(b)Find the fundamental value of a share of common stock for Scarlet Enterprises.

(c)Is the required return (obtained in (a)) a nominal return or a real return? Explain how inflation is taken into account in the calculation of Scarlet's fundamental value.

(d)Find the internal rate of return for an investor purchasing and holding a share of Scarlet Enterprises.

(e)Using the internal rate of return as a proxy for the expected return, find the projected alpha of investment in Scarlet stock.

Answer rating: 100% (QA)

Solving for Scarlet Enterprises Stock a Required Return Calculate the expected dividend growth rate ... View the full answer