Given the following information for the stock of Foster Company, calculate the risk premium on its common stock.

Integrative—Risk and Valuation

(Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.)

Current price per share of common stock	$54.71
Expected dividend per share next year	$2.38
Constant annual dividend growth rate	7.1%
Risk-free rate of return	4.3%

Solutions

Expert Solution

Price of stock = Expected dividend / (Ke - g)

$54.71 = $2.38 / (Ke - 0.071)

54.71(Ke - 0.071) = 2.38

54.71Ke - 3.88441 = 2.38

54.71Ke = 2.38 + 3.88441

54.71Ke = 6.26441

Ke = 6.26441 / 54.71

Ke = 0.1145 or 11.45%

Risk premium = Expected rate of return - Risk-free rate of return

Risk premium = 11.45% - 4.3%

Risk premium = 7.15%

jeff jeffy answered 2 years ago

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