Question

Big Cola 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 1.15, the market risk premium is 5.00%, and the risk-free rate is 4.00%. What is the company’s current stock price,

Answer 1

Answer:

Explanation:

Given that,

Risk free rate = 4%

Beta = 1.15

Market risk premium = 5%

Paid dividend per share = $0.75

Required rate of return:

= Risk free rate + (Beta × Market risk premium).

= 4% + (1.15 × 5 % )

= 4% + 5.75 %

= 9.75 %

Current stock price:

= Expected dividend per share ÷ (Required rate of return - Growth in dividends)

= [0.75(1 + 0.055)] ÷  (0.0975 - 0.055)

= 0.79125 ÷ 0.0425

= $ 18.62 (approx).