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? $18.62 $19.08 $19.56 $20.05 $20.55

Answer 1

Answer:

The company's current stock price is $ 18.62.

Explanation:

To calculate the company's current stock price we have to use first the following formula to calculate the: Expected Return of stock

Expected Return of stock = Risk Free Rate+ Beta * Market Risk Premium  

Expected Return of stock= 4+1.15*5      

=4+5.75      

Expected Return = 9.75%      

Then, we can calculate the stock price with the following formula:

Price = Dividendat year 1/ Return- Growth    

D1 =0.75*105.5%    

=0.79125      

Price =0.79/( 0.0975-0.055)      

=18.62      

The price is $ 18.62