Question

Schnusenberg Corporation just paid a dividend of D ₀ = $0.75 per share, and that dividend is expected to grow at a constant rate of 6.50% per year in the future. The company's beta is 1.70, the required return on the market is 9.50%, and the risk-free rate is 4.50%. What is the company's current stock price? Do not round intermediate calculations.

	a.	$9.74
	b.	$10.52
	c.	$12.29
	d.	$7.89
	e.	$7.40

Answer 1

As per the Capital Asset Pricing Model, required return = risk free rate + (Required return on market - risk free rate )* beta

= 4.50%+(9.50%-4.50%)*1.70

= 13%

Current Stock Price = Expected Dividend / (required return-Growth Rate)

= [Current Dividend * (1+Growth Rate)] / (required return-Growth Rate)

= [ 0.75*(1+6.50%)]/(13%-6.50%)

= $ 12.29

Answer = C. $ 12.29