Question

Dunder Mifflin has a beta of 1.8 and just paid a dividend of $1.50 that is expected to grow at 7% per year for the foreseeable future. If the risk-free rate is 3% and the market risk premium is 6%, what should be the price of their stock in seven years? A. $26.18 B. $37.90 OC. $35.42 O D. $23.60

Answer 1

Hello Sir/ Mam

YOUR REQUIRED ANSWER IS OPTION B : $37.90

We know that:

$K_e=R_f+\beta (ER_m-R_f)$

$K_e=3\%+1.8 *6\%=13.8 \%$

Hence,

Dividend Just Paid	$1.50
Growth rate	7.00%
Rate of Return	13.8%

$\\ P_0 = \frac{D_1}{K_e-g} \\ P_0 = \frac{2.40867221471765*(1+0.07)}{0.138-0.07} \\ \\ P_0 = \frac{2.57727926974788}{0.068} \\ \\ P_0 = \$37.9$

I hope this solves your doubt.

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