A company just paid a dividend of $2 per share, and that dividend is expected to grow at a constant rate of 3% per year in the future. The company's beta is 2, the expected return on the market is 8% and the risk-free rate is 3%. What is the company's current stock price?

Question

Business

Lydon

25 January, 05:28

A company just paid a dividend of $2 per share, and that dividend is expected to grow at a constant rate of 3% per year in the future. The company's beta is 2, the expected return on the market is 8% and the risk-free rate is 3%. What is the company's current stock price?

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Ernesto Gates · Answer 1

Current dividend (Do) = $2

Growth rate (g) = 3% = 0.03

Beta (β) = 2

Risk free rate (Rf) = 3%

Market return (Rm) = 8%

Ke = Rf + β (Rm - Rf)

Ke = 3 + 2 (8 - 2)

Ke = 3 + 12

Ke = 15%

Po = Do (1 + g)

Ke - g

Po = $2 (1 + 0.03)

0.15 - 0.03

Po = $2.06/0.12

Po = $17.17

Explanation:

In this case, we will calculate cost of equity based on capital asset pricing model. Then, we will calculate the current stock price. The current stock price is a function of current dividend paid subject to growth rate divided by the diffrence between cost of equity and growth rate.