Question

Schnusenberg Corporation just paid a dividend of D0 = $0.75 per share, and that dividend is expected to grow at a constant rate of 7% per year in the future. The company's beta is 1.25, the required return on the market is 10.50%, and the risk-free rate is 4.50%. What is the company's current stock price?

Answer 1

Dividend just paid (D0) = $0.75 per share

Growth rate of Dividend in future(g) = 7% per year

As per CAPM,

R_f = Risk free Return = 4.50%                                                    

R_m = Market return = 10.50%

B =Beta of Stock = 1.25

Required rate of Return = 4.50% + 1.25(10.50%-4.50%)

= 12%

So, Required rate of Return(Ke) = 12%

Calculating the Current Stock Price:-

Price = $16.05

So, the company's current stock price is $16.05

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