CFA Practice Question
An analyst wishes to estimate the price of a stock and has gathered the following information:
Retention Ratio 0.70
Beta 2
Market Risk Premium 6%
Risk-Free 3%
Growth rate of dividends 4%
Yield on firm's 5 year bonds 5.5%
Current EPS $10
Retention Ratio 0.70
Beta 2
Market Risk Premium 6%
Risk-Free 3%
Growth rate of dividends 4%
Yield on firm's 5 year bonds 5.5%
What is the firm's price per share?
A. 28.36
B. 23.11
C. 27.27
Explanation: Price = EPS*(1 - retention ratio)*(1 + growth rate) / (Required rate of return - growth rate). Calculate required rate of return using CAPM.
User Contributed Comments 1
| User | Comment |
|---|---|
| praj24 | 10*0.3*1.04 = 3.12 (3+2(6 market risk prem)) - 4% = 11% 3.12/0.11 = 28.36 |