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Bavarian Sausage is expected to pay a dividend of $1.7 per share at the end of the year, and that dividend is expected to grow at a constant rate of 3% per year in the future. The company's beta is 1.5, the market risk premium is 5%, and the risk-free rate is 2%. What is the company's current stock price in $

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Answer:

$26.15

Explanation:

For calculating current stock price of the Bavarian Sausage, first we will calculate the cost of return on the share using Capital Asset Pricing Model and shall be determined as follow:

Cost of equity=Risk free return+Beta*Market risk premium

Applying the data in the question to above mentioned equation as follow

Cost of equity=2%+1.5*5%

                       =9.5%

Now we will calculate the current price of the Bavarian Sausage using the below mentioned formula:

Price of Bavarian Sausage=D(1+g)/cost of equity-g

Where

D(1+g)=Dividend expected to be paid at the end of year=$1.7

Cost of equity=9.5%

g=growth rate=3%

Price of Bavarian Sausage=1.7/9.5%-3%=$26.15

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