Low Fly Airline Is Expected to Pay a Dividend of $7

question 13

Multiple Choice

Low Fly Airline is expected to pay a dividend of $7 in the coming year. Dividends are expected to grow at the rate of 15% per year. The risk-free rate of return is 6%, and the expected return on the market portfolio is 14%. The stock of Low Fly Airline has a beta of 3.00. The intrinsic value of the stock is

• A) $46.67.
• B) $50.00.
• C) $56.00.
• D) $62.50.

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Definitions:

Market Prices

The prevailing price for goods or services in a competitive marketplace, determined by supply and demand.

Capital Structure

The composition of a firm's financing through a mix of debt, equity, and other financial instruments, affecting its risk and valuation.

Dividend Payout Ratios

The fraction of earnings paid to shareholders in dividends, usually expressed as a percentage.

Pretax Cost of Debt

The rate of interest a company pays on its borrowings before tax adjustments, often used in calculating the cost of capital for a company.