Query of fm

Solution to your query-

Given in Ques

Current MP=40 (P0), RF=5.2%, Beta=0.8, Market Risk Premium (Market Rate of Return-Rf)=6%, Expected Dividend(D1)=3

First of all calculate Ke by CAPM modle

Ke=Rf+beta*Market risk premium

i.e, 0.052+0.8*.06=0.1 or 10%

now calculate Growth rate

Ke=D1/P0+g

.1=3/40+g,  g=0.025 or 2.5%,

then calculate markt price at the end of 3 yrs

P1=P0(1+g)

40(1+.025) raise to the power 3

P1=43.07 mkt price at the end of 3 yrs....

i  thnk it must be correct...