ABC company has a current stock price of $40.00 and expects to pay a dividend in one ONE year of $1.80. The dividend is expected to grow at a constant rate of 6% annually. ABC Company has a beta of 0.95, the market is expected to return to 11%, and the risk-free rate of interest is 4%. The expected stock price two years from today is closest to:
A:$41.03
B.$43.38
C.$43.49
D. $43.94
Computation of required rate = risk free rate + market risk premium *Beta | |||||
4%+(11%-4%)*0.95 | |||||
10.650% | |||||
Price 2 year = Expected dividend 3 year/(required rate - Growth rate) | |||||
1.8*106%^2/(10.65%-6%) | |||||
$ 43.49 | |||||
answer =option D) | $ 43.49 | ||||
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