Question

Schnusenberg Corporation just paid a dividend of D 0 = $0.75 per share, and that dividend is expected to grow at a constant rate of 6.50% per year in the future. The company's beta is 1.25, the required return on the market is 10.50%, and the risk-free rate is 4.50%. What is the company's current stock price?
a. $14.52
b. $14.89
c. $15.26
d. $15.64
e. $16.032

Answer 1

Answer:

Current stock price will be $14.50

So option (a) will be correct answer

Explanation:

We have given dividend paid $D_0= 0.75\ per\ share$

Growth rate g = 6.5 %

Required return on market = 10.50 %

Risk free return = 4.50 %

$\beta =1.25$

So next dividend $D_1=0.75\times (1+0.065)= 0.798$

We have to find thcompany current stock price $P_0$

Required rate of return is given by

Required rate of return =  Risk Free Return + $\beta (market\ return-risk\ free\ return)$

= 4.5+1.25×(10.5-4.5) = 12 %

Now current stock price $P_0=\frac{D_1}{R_e-g}=\frac{0.798}{0.12-0.065}= 14.50$

So option (a) will be correct option