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?

Question

Quizplus · Accepted Answer

The correct answer is A because the current stock price, P0, can be calculated using the Gordon Growth Model: P0 = D1 / (r - g), where D1 is the expected dividend in one year, r is the required rate of return, and g is the constant growth rate. In this case, D1 = $0.75 * (1 + 0.055) = $0.79125, r = 4.00% + 1.15 * 5.00% = 9.75%, and g = 5.50%. Plugging these values into the formula, we get P0 = $0.79125 / (0.0975 - 0.055) = $18.62.

The Isberg Company Just Paid a Dividend of $0