Question

In July 1993, the Walt Disney Company's common stock was trading in the range $36 to $41 per share. It paid dividends of $ .25 per share annually, on earnings of $1.80 (estimated for the fiscal year ending in September 1993)

a) If Disney bonds pay 7.55%, what rate of return should one expect for holding Disney common stock?

b) How much must Disney's stock price go up this year to give an investor that rate of return?

Step 1

Part (a)

Only way this question can be solved is by applying risk premium approach.

Expected rate of return on common stock = Yield of the bond + Risk premium

There is no risk premium mentoned in the question. US equity risk pre...

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