Question

The Isberg Company just paid a dividend of $0.75 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 1.25, the market risk premium is 5.00%, and the risk-free rate is 4.00%. What is the company's current stock price, P?

Answer 1

Answer: $ 16.66

Explanation: As we know that :-

Stock price = D1/ ( R - g)

where,

D1 = Expected dividend for next year

R = cost of capital

g = growth rate

So now,

D1 = D (1+g) = 0.75 (1 + 5.5%) = $0.79125

g = 5.5%

R = rf + (β) * (ERm)

= 4% + (1.25) * (5%)

= 10.25%

Now, putting the values into equation we get :-

Stock price = $0.79125/ ( 10.25% - 5.5% )

= $16.66