2. Bolthouse Farms paid a quarterly dividend of $0.50 recently. Treasury bills a
ID: 2648450 • Letter: 2
Question
2. Bolthouse Farms paid a quarterly dividend of $0.50 recently. Treasury bills are yielding 2%, and the market risk premium is currently 6%. Bolthouse Farms is a stable company. The return on its stock responds to changes in the political and economic environment only about 80% as vigorously as that of the average stock. Analysts expect the firm to grow at an annual rate of 4.5% into the indefinite future. Calculate a reasonable price that investors should be willing to pay for Whole Foods stock.Explanation / Answer
Answer:
Given that
Annual Dividend paid (D0) =0.50*4 = $2
Risk Free rate of Return (RF) = 2%
Market Risk premium (MRP) =6%
Beta (B) = 1*80% = 0.80
Growth rate (g) = 4.5%= 0.045
As per formula : Required rate (Ke) = RF + B*MRP
Ke =2% + 0.8*6%
=6.8% = 0.068
Now are per dividend growth formula:
Value (P0)= D0*(1+g) / (Ke-g)
=2*(1+0.045) / (0.068
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