Credibility risk premium to the required return

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Reference no: EM131450567

Melissa is trying to value ABC Company’s stock, which is clearly not growing at all. ABC declared and paid a $5 dividend last year. The required rate of return for this industry’s stock is 11%, but Melissa is unsure about the financial reporting integrity of ABC’s finance team. She decides to add an extra 1% “credibility” risk premium to the required return as part of her valuation analysis. Based on the different reporting by ABC and Melissa, how would you interpret that difference? Defend your answer.

Reference no: EM131450567

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