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 1.15, the market risk premium is 5.00%, and the risk-free rate is 4.00%. What is the company's current stock price, P0? a. $19.56 b. $19.08 c. $20.05 d. $18.62 e. $20.55

Answer 1

Answer:

d) $18.62

Explanation:

Hi, first, let´s introduce the formula to find the price of this stock.

$Price=\frac{D_{0} (1+g)}{(r-g)}$

Where:

Do = Last Dividend

g = growth rate

r = cost of equity

We have almost everything, all we need to do is find "r". That is:

$r=rf+beta*MRP$

Where:

rf = risk Free rate

MRP = market risk premium.

So, we find r first as follows:

$r=0.04+1.15*0.05=0.0975$

therefore, r = 9.75%. Now we are ready to find the price of the stock.

$Price=\frac{0.75*(1+0.055)}{0.0975-0.055} =18.62$

The price of this stock is $18.62

Best of luck.