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Berg Inc. has just paid a dividend of​ $2. Its stock in now selling for​ $48 per share. The firm is half as risky as the market. The expected return on the market is​ 14%, and the yield on U.S. Treasury bonds is​ 11%. If the market is in​ equilibrium, what rate of growth is​ expected?

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Answer:

Explanation:

Given the following :

Price of stock (p) = $48/share

Dividend (d) = $2

Expected return on market = 14%

Yield on Treasury bond = 11%

If market is in equilibrium ; Expected growth Rate will be:

Required rate of return (r):

Yield on Treasury + ( expected return on market - yield on Treasury) × 0.5

11% + (14% - 11%)× 0.5

11% + 1.5% = 12. 5% = 0.125

Using:

P = d(1 - g) / (r - g)

Where G = growth rate

48 = 2(1 + g) / (0.125 - g)

(0.125 - g)48 = 2 + 2g

6 - 48g = 2 + 2g

-48g - 2g = 2 - 6

-50g = - 4

g = 4 / 50

g = 0.08 = 8.0%

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