Question

In: Finance

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

Integrative—Risk and Valuation   

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

(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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