The Isberg Company just paid a dividend of $0.80 per share, and that dividend is expected to grow at a constant rate of 6.00% per year in the future. The company's beta is 1.25, the market risk premium is 5.00%, and the risk-free rate is 4.00%. What is the company's current stock price?
To calculate the current stock price of the Isberg Company, we can use the Dividend Discount Model (DDM) formula:
Stock Price = Dividend / (Required Rate of Return - Dividend Growth Rate)
First, we need to calculate the required rate of return using the Capital Asset Pricing Model (CAPM):
Required Rate of Return = Risk-Free Rate + Beta * Market Risk Premium
Required Rate of Return = 4.00% + 1.25 * 5.00% = 4.00% + 6.25% = 10.25%
Now, we can determine the current stock price:
Dividend = $0.80
Dividend Growth Rate = 6.00%
Required Rate of Return = 10.25%
Stock Price = $0.80 / (10.25% - 6.00%)
Stock Price = $0.80 / 4.25%
Stock Price = $0.80 / 0.0425
Stock Price = $18.82
Therefore, the current stock price of the Isberg Company is $18.82 per share.