Tangshan China's Stock Is Currently Selling for $160

question 119

Essay

Tangshan China's stock is currently selling for $160.00 per share and the firm's dividends are expected to grow at 5 percent indefinitely. In addition, Tangshan China's most recent dividend was $5.50. The expected risk free rate of return is 3 percent, the expected market return is 8 percent, and Tangshan has a beta of 1.20.
(a) What is the expected return based on the dividend valuation model?
(b) What is the required return based on the CAPM?
(c) Would Tangshan China be a good investment at this time? Explain

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Definitions:

Common Stock

A form of corporate equity ownership, a type of security representing units of ownership or equity in a corporation.

Zero-growth Perpetuity

A type of investment that pays a fixed amount of cash flows indefinitely, with no expectation of growth in the payments.

Stable Cash Flow Patterns

A financial condition where the inflows and outflows of cash are predictable and consistent over time, facilitating business planning.

Discounted Free Cash Flow

A valuation method that estimates the value of an investment based on its expected future cash flows, adjusted for the time value of money.