The Palmer Fruit Companys beta is 95 the market risk premium

The Palmer Fruit Company’s beta is .95, the market risk premium is 5.50%, and the risk-free rate is 3.00%. The firms dividend next year is expected to be $1.50 per share. That dividend is expected to grow at a constant rate of 5.00% per year. What should be the current price of Palmer\'s stock? $57.62 $12.89 $62.50 $46.51

Solution

Risk-free Rate = 3.00%
Beta = 0.95
Market Risk Premium = 5.50%

Required Return = Risk-free Rate + Beta * Market Risk Premium
Required Return = 3.00% + 0.95 * 5.50%
Required Return = 8.225%

Expected Dividend = $1.50
Growth Rate = 5.00%

Current Price = Expected Dividend / (Required Return - Growth Rate)
Current Price = $1.50 / (0.08225 - 0.05)
Current Price = $1.50 / 0.03225
Current Price = $46.51

So, current price of Palmer’s Stock is $46.51