Competition in the gas industry is expanding rapidly

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Reference no: EM131308111

The Turner Company owns and operates the town's only gas station. The dividend just paid (i.e., D0) was $2, but since competition in the gas industry is expanding rapidly, you expect the dividend to remain constant (NOT THE DIVIDEND GROWTH RATE) for the next five years, after which time dividends will decline at a 6% rate (so dividend growth rate is negative 0.06) indefinitely thereafter. The beta of Turner Company is 1.3.

1. What rate of return should you require on the stock of Turner Company?

Hint: Using CAPM.

a. 36.85%

b. 37.92%

c. 32.37%

d. 33.42%

e. 31.02%

2. Assume your answer to question 13 is 20%. How much would you be willing to pay for a share of Turner Company's stock?

a. 9.601

b. 7.796

c. 8.887

d. 9.089

e. 8.232

3. How would your answer to question 14 change if you only intended to hold the stock for five years?

a. It will increase;

b. It will decrease;

c. It remains the same as question 14

d. No enough information to determine

Reference no: EM131308111

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