Question

Dividend Growth Model & CAPM

A company’s stock has the following attributes:

• Current Market price of $25.00
• Current annual dividend of $1.50
• Constant dividend growth rate of 4%
• A beta of 1.14

The risk-free rate is currently 3.4% and the market risk premium is 6.0%. If the risk-free rate suddenly jumps to 4.25% what happens to this company’s stock price (Give the price to 2 decimal places)?

Answer 1

given, corrent market price of share = 25 p current diuided (9)= $1.50 constant dividend sote growthe Rate (9) = 46 and they also given , ß= 1.14 risk free rate [RF] = 3.47, market risk premium [Rm. Rf] = 6% the using this information, we can calculate cost of equity ike) through capital asset Pricing model (CAPM). hec Rf + B (Rem-RE] = = 3.4 + 1.14 [G] 8. 10.244. But unfortunately, risk free rate jumps to 4,29).. so that like) cost of equity also changes. ke = Rp + B [Rm=Rf] 4.25 + 1.14 [6] - 11.09.).

Therefore, monket price of share also changes we we can find out this price using the following formula D(1+9) market price (Po ) - etorrent civil kerg - 1.50 1+4.7.) 11.09% -41. = 1.50 (1+0.04) 0.1109-0.04 1.56 0.0709 -) 1,56 - 22.002820 87 44 a decimaly take only company's stock price ($ 22.00)