You are provided the following information of a firm's stocks and bonds along with other pertinent information.
The stocks have a standard deviation of 50% and a correlation of 0.6 with the market index.
The risk-free rate is 2%, and the market risk premium is 7%. The standard deviation of the market is 25%.
The firm just paid dividends of $2.50 per share. Assume that the firm pays dividends annually and that the firm adjusts its dividends to maintain a constant dividend payout ratio of 75%. The ROE of the firm is 15%.
What is the beta of the stock?
What is the cost of equity? [Hint: Use the CAPM]
What is the rate of growth in dividends? What is the stock price? [Note: the answer from part (a) would be your discount rate]
How useful (or limited) is this method in valuing stocks? [1-2 sentences]