Answer to Question #19316 in Finance for shabandar

Question #19316
Church Inc. is presently enjoying relatively high growth because of a surge in the demand for its new product. Management expects earnings and dividends to grow at a rate of 16% for the next 4 years, after which competition will probably reduce the growth rate in earnings and dividends to zero, i.e., g = 0. The company's last dividend, D, was $1.25, its beta is 1.20, the market risk premium is 5.50%, and the risk-free rate is 3.00%. What is the current price of the common stock? a. $18.35 b. $21.01 c. $22.11 d. $16.81 e. $17.03
Expert's answer
Solution:
Today's price equal:
P = D*(1-g)/(k-g) = D*(1-g)/(rfr+beta(rm - rfr)-g)= $1.25*1/(0.03+1.2(0.055))=
$1.25/0.096 = $13.02

Answer: $13.02

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