Question
In: Finance
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 |
Solutions
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
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