Gates Industries current common stock dividend (year 0) is $2.50 per share and is expected to continue growing at a rate of 5% per year for the foreseeable future.Currently the risk-free rate is 7.5% and the estimated market risk premium (i.e., km - rf) is 8.3%.Value Line has estimated Gates Industries beta to be 1.10.Determine the expected price for Gates Industries common stock.
A)$21.50
B)$15.03
C)$15.78
D)$22.57

Question

Quizplus · Accepted Answer

kₑ = 7.5% + 1.10(8.3%) = 16.63%
P₀ = $2.50(1.05)/(0.1663 - 0.05) = $22.57

Gates Industries Current Common Stock Dividend (Year 0) Is $2