Question

Sales                                         &nbs

  • Sales                                                                = 19,000 units
  • Sales prices per units                                       = $12
  • Variable cost per unit                                      = $5
  • Fixed Costs                                                     = $10,000
  • Bonds outstanding                                          = $10,000
  • Interest Rate on outstanding bonds                 = 8%
  • Tax rate                                                           = 40%
  • Share of common stock outstanding               = 20,000 shares
  • Beta                                                                 = 1.4
  • Risk Free Rate                                                 = 5%
  • Market Risk Premium                                     = 9%
  • Dividend payout ratio                                      = 70%
  • Growth rate                                                     = 8%

Calculate the current price per share for gumbo Corporation

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Answer #1

Required Rate of return of Equity = Risk free + Beta * Market Risk Premium

Required Rate of return of Equity = 5% + 1.40 * 9%

Required Rate of return of Equity = 17.60%

Current Stock price = Dividend * (1 + Growth rate) / (Required Return - Growth rate)

Current Stock price = 1.0962 * (1 + 0.08) / (17.60% - 8%)

Current Stock price = $12.33 Per Share

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