16 September, 03:41

# Temple Lunch Trucks, Inc. just paid a dividend of \$2.00. Dividends are expected to grow at a rate of 3% per year from here on out. If the risk-free rate is 2%, the MRP is 8%, and Temple Lunch Trucks' stock is only 40% as risky as the market, what is the most that you should be willing to pay for a share of this stock today?

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Answers (1)
1. 16 September, 05:33
0
= \$93.64

Explanation:

Price = D1 / (r-g)

D1 = Dividend next year = D0 (1+g)

D1 = 2 (1.03) = 2.06

g; growth rate = 3%

r = required return (Use CAPM to find it) as shown below;

CAPM; r = risk free + beta (MRP)

beta = 40% * 1 (since market beta is equal to 1)

therefore, Beta = 0.4

CAPM; r = 2% + (0.4*8%) = 5.2%

Next, use the rate of return i. e 5.2%, to calculate the price of the stock;

Price = D1 / (r-g)

= 2.06 / (5.2% - 3%)

Price = \$93.64
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