Question

National Advertising just paid a dividend of D 0 = $1.25 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 1.5, 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?

a.

$16.64

b.

$17.26

c.

$18.89

d.

$19.02

Answer #1

**Given,**

**Current dividend = $1.25**

**Growth rate (g) = 6.50% or 0.065**

**Beta = 1.5**

**Return on the market = 10.50%**

**Risk free rate = 4.50%**

**Solution :-**

**Expected return (r) = Risk free rate + beta(return on
the market - risk free rate)**

**= 4.50% + 1.5(10.50% - 4.50%)**

**= 4.50% + 1.5(6.00%)**

**= 4.50% + 9.00% = 13.50% or 0.135**

**Expected dividend = Current dividend x (1 +
g)**

**= $1.25 x (1 + 0.065)**

**= $1.25 x 1.065 = $1.33125**

**Now,**

**Current stock price = Expected dividend/(r -
g)**

**= $1.33125/(0.135 - 0.065)**

**= $1.33125/0.07 = $19.02**

**Option 'd' is correct.**

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