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2 August, 05:03

The Isberg 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 1.25, the market risk premium is 5.00%, and the risk-free rate is 4.00%. What is the company's current stock price, P?

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  1. 2 August, 08:18
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    Answer: $ 16.66

    Explanation: As we know that : -

    Stock price = D1 / (R - g)

    where,

    D1 = Expected dividend for next year

    R = cost of capital

    g = growth rate

    So now,

    D1 = D (1+g) = 0.75 (1 + 5.5%) = $0.79125

    g = 5.5%

    R = rf + (β) * (ERm)

    = 4% + (1.25) * (5%)

    = 10.25%

    Now, putting the values into equation we get : -

    Stock price = $0.79125 / (10.25% - 5.5%)

    = $16.66
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