Question

Question 15 2 pts Company A just paid a $1.00 dividend per share and its future dividends are expected to grow at an annual rate of 6% for the foreseeable future. The beta of company A's stock is 1.25, the risk-free rate of return is 4% and the expected return on the market portfolio is 10.4%. The value of the stock today is $. Do not put a $ sign in your answer and round to 2 decimal points. Previous Next Laat aholiad at 2.25nm Submit Quiz

Answer 1

First we shall calculate cost of equity = Rf + (Rm-Rf) Beta

Rf = 4 %

Rm = 10.4 %

Beta = 1.25

Growth rate (g) = 6 %

= 4 + (10.4-4)1.25

Cost of equity (r)= 12 %

Using Constant growth model Price of stock = D1/ r- g

= $ 1 (1.06) / 12-6

= 1.06 / 6 %

=$17.67