Question

Angelina's made two announcements concerning its common stock today. First, the company announced that its next annual dividend, which will be paid a year from today, has been set at $2.16 a share. Secondly, the company announced that all future dividends will increase by 4% annually. Angelina's stock has a beta of 1.15, the risk free rate is 1.95%, and the expected return on the market is 8.95%. What should the current price of Angelina's stock be?

• $21.60

• $22.46

• $26.21

• $34.62

• $36.00

Answer 1

ANSWER :

Given :

D1 = 2.16 ($)

g = 4 % =  0.04

rF = 1.95%

rM = 8.95%

Beta, b = 1.15

As per CAPM :

Required rate of return, r = rF + b(rM - rF) = 1.95 + 1.15(8.95-1.95)

= 10% = 0.1

Now, as per DDM at constant growth :

Current price 

= D1 / (r - g)

= 2.16/ (0.1 - 0.04)

=  36.00 ($)

Current price = 36.00 ($) (ANSWER)

Answer 2

The required rate of return as per CAPM:_

=rf rate+beta*risk premium

=1.95%+1.15*(8.95%-1.95%)

=10%

Current price:-

=Dividend/r-g

=2.16/(10%-4%)

=36