**Only need the answer for the last part. Please show work without excel** Suppo

Question

**Only need the answer for the last part. Please show work without excel**

Suppose a firm's stock beta is 1.4, the expected dividend next period is $3.60 and dividends are expected to grow 4% every period forever. If the expected return on the market is 12% and the risk free rate is 2%, calculate the stock price based on the CAPM and constant growth stock valuation model.

3.6*.04=.144

3.6-.144=3.456

2+1.4(12-2)=16=.16

3.456(1.04)/.16-.04=29.9

What is the price expected at the end of the next period for the stock described in the previous question? Based on the fair market value of the stock described in the previous two questions, what is the dividend yield expected in the next period?

Explanation / Answer

Using CAPM, Cost of equity, r = Rf + beta x (Rm - Rf) = 2% + 1.4 x (12 - 2%) = 16%

Using constant growth model, Stock Price, P0 = D1 / (r - g) = 3.60 / (16% - 4%) = $30.0

A year later, P1 = D2 /(r - g) = D1 x (1 + g) / (r - g) = P0 x (1 + g) = 30 x (1 + 4%) = $31.20

A year later, Expected Dividend yield = D2 / P1 = r - g = 16% - 4% = 12%

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