The Isberg Company just paid a dividend of $0.75 per share, and that dividend is expected to grow at a constant rate of 5.50% per year in the future. The company's beta is 1.15, the market risk premium is 5.00%, and the risk-free rate is 4.00%. What is the company's current stock price, P0?
A) $18.62
B) $19.08
C) $19.56
D) $20.05
E) $20.55

Question

Quizplus · Accepted Answer

The correct answer is A. The current stock price, P0, can be calculated using the Gordon Growth Model:P0 = D1 / (r - g)where:D1 = the expected dividend in one year = $0.75 * (1 + 5.50%) = $0.7913r = the required rate of return = risk-free rate + beta * market risk premium = 4.00% + 1.15 * 5.00% = 9.75%g = the constant growth rate of dividends = 5.50%Plugging in the values, we get:P0 = $0.7913 / (0.0975 - 0.0550) = $18.62Therefore, the company's current stock price is $18.62.

The Isberg Company Just Paid a Dividend of $0