Question

Dyer Furniture is expected to pay a dividend of D1 = $1.25 per share at the end of the year, and that dividend is expected to grow at a constant rate of 6.00% per year in the future. The company's beta is 1.15, the market risk premium is 5.50%, and the risk-free rate is 4.00%. What is Dyer's current stock price?

Answer 1

Answer:

Market price: 28.90

Explanation:

We will calculate the stock price using the gordon dividend grow model:

$\frac{divends}{return-growth} = Intrinsic \: Value$

D1 = 1.25

grow = g = 6% = 6/100 = 0.06

return= for the return, based on the information give, we will calculate it using the CAPM model:

$Ke= r_f + \beta (r_m-r_f)$  

risk free = 0.04

premium market=(market rate - risk free)= 0.055

beta(non diversifiable risk)= 1.15    

$Ke= 0.04 + 1.15 (0.055)$  

Ke =cost of capital = return in the dividend grow formula = 0.10325  

Now, we calculate the stock price:

$\frac{1.25}{0.10325-0.04} = Intrinsic \: Value$

Stock: 28.9017341

Market price: 28.90