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Question: A company recently paid a dividend of $1.45. You expect dividends to grow at a rate or 5% for 1 year, and then level off to 3.5% per year, forever. The company's shares have a correlation with the market of 0.8. The standard deviation of the market is 3.4% and the standard deviation of the stock is 2.5%. The return on T'bills is 3% and the market risk premium is 5%.

a. What would you be willing to pay for this stock today?

b. If the stock is selling in the market for $80, would you recommend buying or selling it? Explain.

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Category:- Basic Finance
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