You are provided the following information of a firm's stocks and bonds along with other pertinent information.

• The stocks have a standard deviation of 50% and a correlation of 0.6 with the market index.
• The risk-free rate is 2%, and the market risk premium is 7%. The standard deviation of the market is 25%.
• The firm just paid dividends of $2.50 per share. Assume that the firm pays dividends annually and that the firm adjusts its dividends to maintain a constant dividend payout ratio of 75%. The ROE of the firm is 15%.

2. What is the beta of the stock?
4. What is the cost of equity?
6. What is the rate of growth in dividends?
8. What is the stock price? [Note: the answer from part (b) would be your discount rate]
10. How useful (or limited) is this method in valuing stocks?

Answer rating: 100% (QA)

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