Problem: One of your client's is looking at an investment in the Consolidated Sprockets, Inc. which sells for $52.60 per share, and paid a recent annual dividend of $2.40. Dividends are expected to increase at 5.45% annually. The current risk free rate is 4.15% and the NYSE market index is returning 14.71%. The beta of Consolidated is .82. The questions are as follows:
Q1. What should the investor's required rate of return be in order to buy Consolidated?
Q2. What is the intrinsic value of Consolidated stock?
Q3. What is the expected rate of return on Consolidated stock?
Q4. Does the expected rate of return for Consolidated beat the market index return?