Vincent Nguyen, an analyst, is examining the stock of British Airways (London Stock Exchange: BAY) as of the beginning of 2008. He notices that the consensus forecast by analysts is that the stock will pay a £ 4 dividend per share in 2009 (based on 21 analysts) and a £ 5 dividend in 2010 (based on 10 analysts). Nguyen expects the price of the stock at the end of 2010 to be £ 250. He has estimated that the required rate of return on the stock is 11 percent. Assume all dividends are paid at the end of the year. Required: a) Using the DDM, estimate the value of BAY stock at the end of 2009. 2. b) Using the DDM, estimate the value of BAY stock at the end of 2008.
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Vincent Nguyen, an analyst, is examining the stock of British Airways (London Stock Exchange: BAY) as of the beginning of 2008. He notices that the consensus
Required:
- a) Using the
DDM , estimate the value of BAY stock at the end of 2009.
2. b) Using the DDM, estimate the value of BAY stock at the end of 2008.
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