A stock is not expected to pay a dividend over the next four years. Fi

QUESTION

A stock is not expected to pay a dividend over the next four years. Five years from now, the company anticipates that it will establish a dividend of $1.00 per share (i.e., D5 = $1.00). Once the dividend is established, the market expects that the dividend will grow at a constant rate of 5% per year forever. The risk-free rate is 5%, the companys beta is 1.2, and the market risk premium is 5%. The required rate of return on the companys stock is expected to remain constant. What is the current stock price?$ 7.36$ 8.62$ 9.89$10.98$11.53
Using CAPM Re=Risk free rate + market risk premium*beta =5%+5%*1.2=11% D5=$1.00 Price of share at the end of 4th year=D5/(Re-g)¦

67 Price at time 0=Price of share at the end of 4th year/(Re-g) =16.67/(1.11^4)= $10.98 Ans $10.98

ANSWER:

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