Answer:
option (a) $18.62
Explanation:
Data provided in the question:
Dividend just paid, D0 = $0.75
Expected growth rate, g = 5.50%
Company's beta = 1.15
Market risk premium, Rm = 5.00%
Risk-free rate, Rf = 4.00%
Now,
D1 = D0 × ( 1 + g)
= $0.75 × ( 1 + 5.5% )
= $0.79125
Required rate of return = Rf + ( beta × Rm )
= 4.00% + ( 1.15 × 5.00% )
= 4.00% + 5.75%
= 9.75%
Also,
Stock price = D1 × ( R - g )
therefore,
Current stock price = $0.79125 ÷ (9.75% - 5.50%)
= $0.79125 ÷ 0.0425
= $18.617 ≈ $18.62
Hence,
The correct answer is option (a) $18.62
