Biotec has estimated the costs of debt and equity capital for various proportions of debt in its capital structure:
If Biotec pays a current dividend of $1.00 and expects dividends to grow at a constant rate of 7%, what is Biotec's stock price if it obtains its optimal capital structure?
A) $14.66
B) $30.40
C) $30.14
D) $29.40

Question

Biotec has estimated the costs of debt and equity capital for various proportions of debt in its capital structure: 
If Biotec pays a current dividend of $1.00 and expects dividends to grow at a constant rate of 7%, what is Biotec's stock price if it obtains its optimal capital structure?
A) $14.66 
B) $30.40 
C) $30.14 
D) $29.40

Quizplus · Accepted Answer

Solution: P₀ = 1.00(1.07)/(0.143 - 0.07) = $30.40

Biotec Has Estimated the Costs of Debt and Equity Capital