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5 October, 01:17

The Jameson Company just paid a dividend of $0.75 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 1.15, the market risk premium is 5.00%, and the risk-free rate is 4.00%. What is Jameson's current stock price, P0? a. $18.62b. $19.08c. $19.56d. $20.05e. $20.55

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  1. 5 October, 04:27
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    Current price of the stock of Jameson company is $18.62. Therefore, the correct option is A

    Explanation:

    The formula of required rate of return is:

    Required rate of return = Risk free rate + Beta * Market risk premium

    = 4% + 1.15 * 5%

    = 4% 5.75%

    = 9.75%

    Computation of current stock price is:

    Current stock price = Expected dividend per share / (Required rate of return - Growth in dividend)

    = (0.75 + [5.50% * 0.75]) / (0.0975 - 0.055)

    = 0.79125 / 0.0425

    = $18.62
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