Question

National Advertising just paid a dividend of D0 = $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 1.25, the required return on the market is 10.50%, and the risk-free rate is 4.50%. What is the company's current stock price?

Answer 1

Current stock price $14.52

Step-by-step explanation:

We should calculate the cost of capital using the CAPM

`Ke= r_f + \beta (r_m-r_f)\\\\Where:\\r_f =$ risk free rate\\r_m= $ market rate\\\beta =non-diversifiable \:risk`

β 1.25

market rate 10.5%

free risk rate 4.5%

0.045 + 1.25(0.105-0.045) = .12

Now we can use the dividen growth model to calculate the market price of the share:

`(divends)/(return-growth) = Intrinsic \: Value`

notice it should be next year dividends so:

.75 x 1.065 = .79875

and now we proceeed:

.79875/(.12-.065) = 14.52272727 = 14.52