Question

Your broker suggests that the stock of DUH is a good purchase at $25. You do an analysis of the firm, determining that the recent $1.40 dividend and earnings should continue to grow indefinitely at 5 percent annually. The firm's beta coefficient is 1.3, and the yield on Treasury bills is 1.4 percent. If you expect the market to earn a return of 8 percent, what is your valuation of DUH

Answer 1

Answer:

The correct answer is "$28.03".

Explanation:

The given values are:

Good purchase,

= $25

Dividend,

= $1.40

Annually earning,

= 5%

Beta coefficient,

= 1.3

Treasury bills,

= 1.4%

Now,

= $1.4+1.34\times 8-1.4$

= $1.34\times 8$

= $10.244$ (%)

hence,

The fair value will be:

= $1.4\times \frac{1.05}{.10244}-.05$

= $28.03$

Absolutely, the proposal including its brokerage must be adopted because as fair market value was almost $25.