The Isberg Company justpaid a dividend of $0.80 per share, and that dividend ise
ID: 2770545 • Letter: T
Question
The Isberg Company justpaid a dividend of $0.80 per share, and that dividend isexpected to grow at a constant rate of 6.00% per year in thefuture. The company's beta is 1.25, the market risk premium is5.00%, and the risk-free rate is 4.00%. What is the company'scurrent stock price? The Isberg Company justpaid a dividend of $0.80 per share, and that dividend isexpected to grow at a constant rate of 6.00% per year in thefuture. The company's beta is 1.25, the market risk premium is5.00%, and the risk-free rate is 4.00%. What is the company'scurrent stock price? $19.95 $20.45 $20.96 $21.49 $22.02Explanation / Answer
Isberg Company just paid a dividend (D0) =$0.80
Dividend constant growth rate(g) = 6%
Company’s(ß) = 1.25
Market risk premium (Rm) = 5%
Risk – free rate (Rf) = 4%
Required return(Re) = Rf + ß (Rm)
= 0.04 + 1.25(0.05)
Company’s Current Stock Price(P0) = D1 / (R –g)
D1 = D0 * (1+g)
D1 = $0.80 * (1+0.06)
D1 = $0.848
Company’s Current Stock Price (P0) =$0.848 / (10.25% - 6%)
= $0.848 / 4.25%
= $0.848 / 0.0425
= $19.95
IsbergCompany’s Current Stock Price(P0) = $19.95
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