Excel Corporation just paid a dividend of D0100 per share an

Excel Corporation just paid a dividend of D0=$1.00 per share, and that dividend is expected to grow at a constant rate of 4.00% per year in the future. The company\'s beta is 1.44, the required return on the market is 11.00%, and the risk-free rate is 2.21%. What is the companies current stock price?

Solution

required rate of return = risk free rate+(market return-risk free rate)*beta

2.21+(11-2.21)*1.44 =14.8676 = 14.87%

Expected dividend = current dividend*(1+growth rate)

1*(1.04) = 1.04

value of share = expected dividend/(required return-growth rate)

1.04/(14.87%-4%) = 9.567 = 9.57

stock price = 9.57