Question 25 4 pts The Horizon Company just paid a dividend of $1.25 rate of 5.50$...

Question

Question

business finance

Answer 1

Answer #1

Using the dividend growth model we can calculate the current price of bond

Price of shares	[D0*(1+g)]/(Ke-g)

D0 represents dividend paid today
g represents growth rate
ke represents required return on equity

Using the CAPM model we can calculate the required return on equity

Ke	Rf + Beta*(Rm-Rf)

Ke represents return of portfolio
Rf represents risk free rate of return
(Rm-Rf) represents market risk premium

Ke	0.02 + (1.15*0.07)
Ke	10.05%

Price of shares	[1.25*(1.055)]/(0.1005-0.055)
Price of shares	1.31875/0.0455
Price of shares	$28.98

Thus, current stock price is $28.98.

Answer 2

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