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**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.

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**User Contributed Comments**
1

User |
Comment |
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praj24 |
10*0.3*1.04 = 3.12 (3+2(6 market risk prem)) - 4% = 11% 3.12/0.11 = 28.36 |