Question

The bunch company is expected to pay a dividend of d1 = $2.85 per share at the end of the year, and that dividend is expected to grow at a constant rate of 5.00% per year in the future. The company's beta is 1.20, the required return on the market is 12.50%, and the risk-free rate is 2.50%. What is the company's current stock price?

Answer 1

The current stock price of the Bunch Company is $47.50 per share.

Step-by-step explanation:

To calculate the current stock price of the Bunch Company, we can use the dividend discount model. The formula for the stock price is P = D1 / (r - g), where P is the stock price, D1 is the dividend at the end of the year, r is the required return on the market, and g is the dividend growth rate.

In this case, the dividend at the end of the year is $2.85, the required return on the market is 12.50%, and the dividend growth rate is 5.00%.

Using the formula, we can calculate the stock price of the Bunch Company as follows:

P = $2.85 / (0.1250 - 0.0500) = $47.50.

Therefore, the current stock price of the Bunch Company is $47.50 per share.