The Island Hotel Company, Inc. just paid a dividend of $2.75 per share, and that dividend...

Question

Question

The Island Hotel Company, Inc. just paid a dividend of $2.75 per share, and that dividend

is expected to grow at a constant rate of 5.50% per year in the future. The company's

beta is 2.95, the market risk premium is 6.75%, and the risk-free rate is 3.50%. Using

CAPM, at what price should the company's stock sell?

Answer 1

Answer #1

Answer:

Using CAPM

Required return=risk free rate+beta*market risk premium

=3.5+(2.95*6.75)=23.4125%

Current price=D1/(Required return-Growth rate)

=(2.75*1.055)/(0.234125-0.055)

= 16.19679

=$16.20(Approx).

Answer 2

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