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18 March, 13:38

Big Cola 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,

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  1. 18 March, 14:00
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    Given that,

    Risk free rate = 4%

    Beta = 1.15

    Market risk premium = 5%

    Paid dividend per share = $0.75

    Required rate of return:

    = Risk free rate + (Beta * Market risk premium).

    = 4% + (1.15 * 5 %)

    = 4% + 5.75 %

    = 9.75 %

    Current stock price:

    = Expected dividend per share : (Required rate of return - Growth in dividends)

    = [0.75 (1 + 0.055) ] : (0.0975 - 0.055)

    = 0.79125 : 0.0425

    = $ 18.62 (approx).
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