Question

A company just paid a dividend of $1.95 per share, and that dividend is expected to grow at a constant rate of 4.50% per year in the future. The company's beta is 1.65, the market risk premium is 8.5%, and the risk-free rate is 5.50%. What is the company's current stock price?

		$12.72
		$13.56
		$14.53
		$15.64
		$16.94

Answer 1

First we need to find the required rate of return using the CAPM equation:

$r_e = r_f + \beta \times (risk \ premium)$

$r_e = 5.50 + 1.65 \times (8.50)$

A company just paid a dividend of $1.95 per share, and that dividend is expected to grow at a constant rate of 4.50% per year in the future.

Using the above rate, we can find the stock price:

$P_0 = \frac{D_0 \times (1+g)}{r-g}$

$P_0 = \frac{1.95 \times (1+0.045)}{0.1953 - 0.045}$