The Muise Company paid a dividend of $2 per share in year 1, andthat dividend...

The Muise Company paid a dividend of $2 per share in year 1, and that dividend is expected to grow at a constant rate of 5% per year in the future. The company's beta is 1.5, the market risk premium is 5.00%, and the risk-free rate is 4.00%. What is the company's current stock price, P₀?

Solutions

Expert Solution

According to CAPM,

Cost of equity = Rf + beta(Rm-Rf) = 4% + 1.5(5%) = 11.50%

NOW,

D1 = 2 , g = 5%

SO,

P0 = D1/(ke-g) = 2/(0.115-0.05) = 30.77

Answer : 30.77

jeff jeffy answered 2 years ago

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