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 1.15, the market risk premium is 5.00%, and the risk-free rate is 4.00%. What is the company's current stock price, P0? a. $18.62 b. $19.08 c. $19.56 d. $20.05 e. $20.55

option (a) $18.62

Explanation:

Data provided in the question:

Dividend just paid, D0 = $0.75

Expected growth rate, g = 5.50%

Company's beta = 1.15

Market risk premium, Rm = 5.00%

Risk-free rate, Rf = 4.00%

Now,

D1 = D0 * (1 + g)

= $0.75 * (1 + 5.5%)

= $0.79125

Required rate of return = Rf + (beta * Rm)

= 4.00% + (1.15 * 5.00%)

= 4.00% + 5.75%

= 9.75%

Also,

Stock price = D1 * (R - g)

therefore,

Current stock price = $0.79125 : (9.75% - 5.50%)

= $0.79125 : 0.0425

= $18.617 ≈ $18.62

Hence,

The correct answer is option (a) $18.62