Cartwright Brothersstock is currently selling for $40 a share. The sto

QUESTION

Cartwright Brothersstock is currently selling for $40 a share. The stock is expected to pay a $2 dividend at the end of the year. The stocks dividend is expected to grow at a constant rate of 7 percent a year forever. The risk-free rate (rRF) is 6 percent and the market risk premium (rM “ rRF) is also 6 percent. What is the stocks beta? a. 1.06 b. 1.00 c. 2.00 d. 0.83 e. 1.08
P0 = D1 Ke “ G P0 = $40 D1 = $2 G = 7% Ke = ? $40 = $2 Ke “ 7% $40 (Ke- 7%)= $2 $40Ke -$2.8= 2 $40Ke = $4.8 Ke = $4.8 = 12% $40¦

Ke = rRF Beta(rM “ rRF) 12% = 6% Beta (6%) 12%-6%= Beta(6%) Beta = 6% = 1 6% Ans is B

ANSWER:

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