Twin City Knitting (TCK) pays a current dividend of $2.20 and dividends are expected to grow at a rate of 7 percent annually in the foreseeable future.The beta of TCK is 1.2.If the risk-free rate is 9.2 percent and the market risk premium is 6 percent, at what price would you expect TCK's common stock to sell?
A)$14.35
B)$33.63
C)$23.40
D)$25.04

Question

Quizplus · Accepted Answer

kₑ = 0.092 + 1.2(0.06) = 0.164 or 16.4%
kₑ = $2.20(1.07)/P₀ + 0.07 = 0.164
P₀ = $2.354/0.094 = $25.04

Twin City Knitting (TCK) Pays a Current Dividend of $2