Respuesta :
Answer:
Current dividend (Do) = $2
Growth rate (g) = 3% = 0.03
Beta (β) = 2
Risk free rate (Rf) = 3%
Market return (Rm) = 8%
Ke = Rf +β(Rm - Rf)
Ke = 3 + 2(8 - 2)
Ke = 3 + 12
Ke = 15%
Po = Do(1 + g)
Ke - g
Po = $2 ( 1 + 0.03)
0.15 - 0.03
Po = $2.06/0.12
Po = $17.17
Explanation:
In this case, we will calculate cost of equity based on capital asset pricing model. Then, we will calculate the current stock price. The current stock price is a function of current dividend paid subject to growth rate divided by the diffrence between cost of equity and growth rate.
The current stock price comes out to be $20.6 for a company after using the CAPM method and DDM method.
What is a stock price?
A stock price is a value at which a company is provided its stock to the investors either at a normal value or a higher value.
Given values for the CAPM method:
Risk-free rate: 3%
Market return: 8%
Market risk premium: 5% (Market return - Risk-free rate)
Beta factor: 2
Step-1 Computation of cost of equity under CAPM method:
[tex]\rm\ Cost \rm\ of \rm\ Equity= \rm\ Risk \rm\ free \rm\ rate + (\rm\ Market \rm\ Risk \rm\ Premium \times\ \rm\ Beta \rm\ factor)\\\rm\ Cost \rm\ of \rm\ Equity=3\% + (5\% \times\ 2)\\\rm\ Cost \rm\ of \rm\ Equity=13\%[/tex]
Given values for the DDM method:
Dividend rate: $2
Growth rate: 3%
Cost of equity: 13%
Step-2 Computation of stock price under DDM method:
[tex]\rm\ Current \rm\ Stock \rm\ price= \frac{Dividend \rm\ rate \times\ (1+ \rm\ Growth \rm\ rate)}{\rm\ Cost \rm\ of \rm\ equity-\rm\ Growth \rm\ rate} \\\rm\ Current \rm\ Stock \rm\ price=\frac{\$2 \times\ (1+ 0.03)}{0.13-0.03} \\\rm\ Current \rm\ Stock \rm\ price=\frac{\$2.06}{0.10} \\\rm\ Current \rm\ Stock \rm\ price=\$20.6[/tex]
Therefore, the price of the stock is determined as $20.6 by solving the equations mentioned above.
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https://brainly.com/question/15021152
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