Business: Aey inc is a company based in the u.s. assuming growth for them is set at 5%, the current risk free rate in the u.s. is 3% and market premium is 8%. aey inc. paid a dividend yesterday of $1.20 and has a beta of 1.3, what is current price per share? if the beta was 0.8 (all else remains constant) what would be new price per share?

Aey inc is a company based in the u.s. assuming

puffley

08.01.2022

Explanation:

A.)

Use CAPM to find rate of return ;

r = risk free + beta (Market risk premium)

risk free = 3% or 0.03 as a decimal

beta = 1.3

Market risk premium = 8% or 0.08

Next, plug in the numbers into the equation to find r ;

r = 0.03 + (1.3*0.08)

r = 0.134 or 13.4%

Use Dividend discount formula to price the stock;

Price (P₀) = $\frac{D0 (1+g)}{r-g}$

whereby, D0= current dividend = $1.20

g= growth rate = 5%

r= required return ( calculated above) = 13.4% or 0.134 as a decimal

P₀ = $\frac{1.20(1.05)}{0.134-0.05} \\ \\ =\frac{1.26}{0.084} \\ \\ = 15$

Therefore current price per share is $15

B.)

If beta is 0.8, you do the exact same thing above and change beta from 1.3 to 0.8;

Use CAPM to find rate of return ;

r = risk free + beta (Market risk premium)

risk free = 3% or 0.03 as a decimal

beta = 0.8

Market risk premium = 8% or 0.08

Next, plug in the numbers into the equation to find r ;

r = 0.03 + (0.8*0.08)

r = 0.094 or 9.4%

Use Dividend discount formula to price the stock;

Price (P₀) = $\frac{D0 (1+g)}{r-g}$

whereby, D0= current dividend = $1.20

g= growth rate = 5%

r= required return ( calculated above) = 9.4% or 0.094 as a decimal

P₀ = $\frac{1.20(1.05)}{0.094-0.05} \\ \\ =\frac{1.26}{0.044} \\ \\ = 28.636$

Therefore current price per share when beta is 0.8 is = $28.64

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