Assume that a company will pay a dividend of D 1 = $1.25 per share on its common

Question

Assume that a company will pay a dividend of D1 = $1.25 per share on its common stock at the end of the year, and that this dividend is expected to grow at a constant rate of 6.00% per year in the future.  The company's beta is 1.15, the market risk premium is 5.50%, and the risk-free rate is 4.00%. What is the company's current stock price (P0)?

Assume that a company will pay a dividend of D1 = $1.25 per share on its common stock at the end of the year, and that this dividend is expected to grow at a constant rate of 6.00% per year in the future. The company's beta is 1.15, the market risk premium is 5.50%, and the risk-free rate is 4.00%. What is the company's current stock price (P0)?

Explanation / Answer

r= 4%+1.5*5.5% = 12.25%

current stock price (P0) = D1/(r-g) = 1.25/(12.25%-6%) =$20

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