Answer:
current stock price = $28.90
so correct option is (a) $28.90
Explanation:
given data
dividend of D1 = $1.25
constant rate = 6.00%
beta = 1.15
market risk premium = 5.50%
risk-free rate = 4.00%
solution
first we get here Expected rate of return that is express as
Expected rate of return = Risk-free rate of return + Beta × (Market rate of return - Risk-free rate of return) .................1
put here value and we get
Expected rate of return = 4% + 1.15 × 5.50%
Expected rate of return = 4% + 6.325%
Expected rate of return = 10.325%
so now we get current stock price
current stock price = Next year dividend ÷ (Required rate of return - growth rate) .................2
put here value and we get
current stock price = $1.25 ÷ (10.325% - 6%)
current stock price = $1.25 ÷ 4.325%
current stock price = $28.90
so correct option is (a) $28.90
