Answer:
$14.52
Explanation:
The calculations proceed as follows:
Step 1: Calculation of expected return
This is done by using the Capital Asset Pricing Model (CAPM) formula as follows:
ERi = Rf + βi(ERm - Rf) ........................................... (1)
Where:
ERi = expected return of investment = ?
Rf = risk-free rate = 4.50% = 0.0450
ERm = market rate = 10.50% = 0.1050
βi = beta of the investment = 1.25
(ERm - Rf) = market risk premium = 0.1050 - 0.0450 = 0.060
Substituting the values into equation (1), we have:
ERi = 0.0450 + 1.25(0.060) = 0.120 = 12%
Step 2: Calculation of current year dividend
D1 = Do × (1 + g) ........................................ (2)
Where;
D1 = current year dividend = ?
Do = last year dividend = $0.75
g = growth rate = 6.50% = 0.065
Substituting the values into equation (2), we have:
D1 = 0.75 × (1 + 0.065) = $0.79875
Step 3: Calculation of current stock price
The dividend growth model formula for calculating stock price is used as follows:
Stock price = D1 ÷ (ERi - g)
= $0.79875 ÷ (0.120 - 0.065)
= 14.5227272727273
Stock price = $14.52.
Therefore, the company's current stock price is $14.52.
