Thames Inc.'s most recent dividend was $2.40 per share . The dividend is expected to grow at a rate of 6 percent per year. The risk-free rate is 5 percent and the return on the market is 9 percent. If the company's beta is 1.3, what is the price of the stock today?

Question

Quizplus · Accepted Answer

The price of the stock today can be calculated using the Gordon Growth Model (Dividend Discount Model) and the Capital Asset Pricing Model (CAPM). First, calculate the required rate of return using CAPM: Required return = Risk-free rate + Beta * (Market return - Risk-free rate) = 5% + 1.3 * (9% - 5%) = 10.2%. Then, use the Gordon Growth Model: Price = Dividend * (1 + Growth rate) / (Required return - Growth rate) = $2.40 * (1 + 0.06) / (0.102 - 0.06) = $60.57.