Question

National Advertising just paid a dividend of D0 = $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 1.85, 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? Select the correct answer. a. $9.23 b. $8.78 c. $7.43 d. $7.88 e. $8.33

Answer 1

Answer:

$8.78

Explanation:

National advertising made dividend payment of $0.75 per share

The dividend is expected to grow at a constant rate of 6.50%

= 6.50/100

= 0.065

The company beta is 1.85

The required return on the market is 10.50%

The risk free rate is 4.50%

The first step is to calculate the rate of return using the CAMP model

R = Risk free rate+beta(market return-risk free rate)

= 4.50%+1.85(10.50%-4.50%)

= 4.50%+1.85×6%

= 4.50%+11.1

= 15.6

Required rate of return= 15.6

Therefore the current stock price can be calculated as follows

Po= Do(1+g)/(r-g)

Where Do= 0.75, g= 0.065, r= 15.6

Po= 0.75(1+0.065)/(0.156-0.065)

Po= 0.75(1.065)/0.091

Po= 0.7987/0.091

Po= $8.78

Hence the company current stock price is $8.78