3.4. Heath Corporation stock has a of 1.25 and it will pay a dividend of $1.60 n

Question

3.4. Heath Corporation stock has a of 1.25 and it will pay a dividend of $1.60 next year. The following table shows the various possible economic situations.

State of the economy

for the next year

Probability

Expected return

of the market

Good

60%

25%

Fair

30%

10%

Poor

10%

-10%

The current riskless rate is 4%. The expected long-term rate of growth of Heath is 7%. Find the value of its common stock. Hint: Assume that the predictions of the economy are short-term, perhaps over the next year. Also, assume that the growth of the dividends are long term, perhaps forever.   

($12.08 ) .--- >>> (ANSWER IS INDICATED FOR GUIDANCE) I NEED SOLUTIONS! THANKS!!!

NOTE: PLEASE HAVE ALL ANSWER IN WORD OR EXCEL FORMAT(EDITABLE FORMAT). NO IMAGE ATTACHMENT, PLEASE!

State of the economy

for the next year

Probability

Expected return

of the market

Good

60%

25%

Fair

30%

10%

Poor

10%

-10%

Explanation / Answer

Expected market return = 0.60 * 25% + 0.30 * 10% + 0.10 * (-10%)

= 17%

Required rate of return = Riske free rate + beta * (Market return - Risk free rate)

= 4% + 1.25 * (17% - 4%)

= 20.25%

Stock price = Dividend to be paid next year / (Required rate of return - Long-term growth rate)

= $1.60 / (20.25% - 7%)

= $12.08

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