Question

El Taco Tote just paida dividend of D₀= $1.75 per share, and that dividend is expected to grow at a constant rate of 5.50% per year in the future. The company's beta is 1.50, the required return on the market is 9.50%, and the risk-free rate is 3.50%. What is the company's current stock price?

Answer 1

Ans $ 83

P0 =	Price of Share
D1 =	Current Dividend
Ke =	Cost of Equity
g =	growth rate
P0 =	D1 / (Ke - g)
P0 =	1.66 / (7.50%-5.50%)
P0 =	83
D0 =	D1 / (1 + g)
D0 =	1.75 / (1 + 5.50%)
D0 =	1.66
Required Return =	Risk free Return + (Market Return - Risk free return)* Beta
9.50% =	3.50% + (Market Return - 3.50%) * 1.50
6% / 1.50 =	(Market Return - 3.50%)
4% =	(Market Return - 3.50%)
Market Return =	7.50%