Magnolia Company's most recent dividend paid was $0.50, the expected growth rate for future dividends is...

Magnolia Company's most recent dividend paid was $0.50, the expected growth rate for future dividends is 2%. The firm’s stock currently has a beta of 1.50 If the expected return is 8% for the market and 3% for a 3-month T-bill, what is the price of Magnolia’s common stock, assuming the growth rate will continue forever?

a.	$6.00
b.	$3.92
c.	$6.67
d.	$3.85
e.	$5.10

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Expert Solution

Cost of equity = Risk-free rate + Beta(Market return - Risk-free rate) = 0.03 + 1.50(0.08 - 0.03) = 0.105 or 10.5%

Price = D0(1 + g) / (r - g) = $0.50(1 + 0.02) / (0.105 - 0.02) = $6.00

jeff jeffy answered 1 year ago

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