Question

The Jameson Company just paid a dividend of $0.75 per share, and that dividend is expected to grow at a constant rate of 5.00% per year in the future. The company's beta is 1.9, the market risk premium is 5.00%, and the risk-free rate is 4.00%. What is Jameson's current stock price, P0

Answer 1

$9.26

Step-by-step explanation:

The computation of the current stock price is shown below:

But before that first determine the required rate of return which is

Required rate of return = Risk free rate + Beta × Market risk premium.

= 4% + 1.9 × 5%

= 4% + 9.5%

= 13.5%

Now the current stock price is

Current stock price (P0) = Expected dividend per share ÷ (Required rate of return - Growth rate)

= ($0.75 + 5.00% of $0.75) ÷ (13.5% - 5%)

= $0.7875 ÷ 8.5%

= $9.26