Question

Bigtown Inc. will pay a dividend of $1.50 next year. The stock price is $13.39 currently, with a beta of 0.9. The market risk premium is 8% and the risk-free rate is 6%. What will the price of Bigtown's stock be if the dividend growth rate doubles?

Answer 1

$16.30 is the price

Explanation:

Firstly, we need to calculate the value of r

$\mathrm{R}=6 \%+0.9 * 8 \%=13.20 \%$

R = (D1/P) + g

Now, putting the figures in the above formula, we get

$13.20 \%=(1.50 / 13.39)+\mathrm{g}$

$G=13.20 \%-(1.50 / 13.39)$

G = 2%

as the growth rate has doubled, then g = 4

the price of the stock = D1/(r-g) = $1.50 \ (13.20 \%-4 \%)}=16.30$

therefore, as per the above calculations, the price of the stock is $16.30 .