Question

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?

Answer 1

Answer:

= $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