Suppose Scoggins Telecom just paid a $5 dividend that is expected to grow every year in...

Suppose Scoggins Telecom just paid a $5 dividend that is expected to grow every year in the future by 3%. The risk-free rate is 2%. The stock market has been returning 8%. The Beta of Scoggins is 1.15. What should be the price of this stock?

Select one:

a. $250.00

b. $84.74

c. $87.29

d. $80.64

Expert Solution

Ans c. $87.29

Cost of Equity =	Risk free Return + (Market Return - Risk free return)* Beta
Cost of Equity =	2% + (8% - 2%) * 1.15
Cost of Equity =	8.90%

P0 =	Price of Share
D1 =	Current Dividend
Ke =	Cost of Equity
g =	growth rate

P0 =	D1 / (Ke - g)
P0 =	5.15 / (8.90%- 3%)
P0 =	87.29


D1 =	D0* (1 + g)
D1 =	5* (1 + 3%)
D1 =	5.1500

jeff jeffy answered 3 years ago

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