Assume a major investment service has just given Big Lake Realty its highest investment? rating, along...

Free

80.2K

Verified Solution

Question

Finance

Assume a major investment service has just given Big Lake Realtyits highest investment? rating, along with a strong buyrecommendation. As a? result, you decide to take a look foryourself and to place a value on the? company's stock.? Here's whatyou? find: This? year, Big Lake paid its stockholders an annualdividend of ?$4.93 a? share, but because of its high rate of growthin? earnings, its dividends are expected to grow at the rate of 9?%a year for the next five years and then to level out at 5 % a year.So? far, you've learned that the stock has a beta of 1.15?, the?risk-free rate of return is 4.8?%, and the expected return on themarket is 10.8?%.
Using the CAPM to find the required rate of? return, put a valueon this stock.

Answer & Explanation Solved by verified expert

4.5 Ratings (963 Votes)

Required Ret = Rf + Beta ( Rm - Rf )

= 4.8% + 1.15 [ 10.8% - 4.8% ]

= 4.8% + 1.15 [ 6% ]

= 4.8% + 6.9%

= 11.7%

Value of STock = PV of CFs from it.

Div Calculation:

Year	CF	Formula	Calculation
1	$ 5.37	D0(1+g)	4.93*1.09
2	$ 5.86	D1(1+g)	5.37*1.09
3	$ 6.38	D2(1+g)	5.86*1.09
4	$ 6.96	D3(1+g)	6.38*1.09
5	$ 7.59	D4(1+g)	6.96*1.09
6	$ 7.96	D5(1+g)	7.59*1.05

P5 = D6 / [ Ke - g ]

= 7.96 / [ 11.7% - 5% ]

= 7.96 / 6.7%

= 118.81

P0 Calculation:

Year	CF	PVF @11.7%	Disc CF
1	$ 5.37	0.895255	$ 4.81
2	$ 5.86	0.801482	$ 4.69
3	$ 6.38	0.717531	$ 4.58
4	$ 6.96	0.642373	$ 4.47
5	$ 7.59	0.575088	$ 4.36
5	$ 118.81	0.575088	$ 68.33
Value of Stock			$ 91.25

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

Assume a major investment service has just given Big Lake Realtyits highest investment? rating, along with a strong buyrecommendation. As a? result, you decide to take a look foryourself and to place a value on the? company's stock.? Here's whatyou? find: This? year, Big Lake paid its stockholders an annualdividend of ?$4.93 a? share, but because of its high rate of growthin? earnings, its dividends are expected to grow at the rate of 9?%a year for the next five years and then to level out at 5 % a year.So? far, you've learned that the stock has a beta of 1.15?, the?risk-free rate of return is 4.8?%, and the expected return on themarket is 10.8?%.Using the CAPM to find the required rate of? return, put a valueon this stock.