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This can be worked out as under:
Required Rate of Return r(m) = r(f) + b r(p), where r(f) is the risk free rate and the r(p) is the risk premium and b is beta and therefore:r(m) = 3.00 + 1.20 * 5.5 = 9.6%.
Hence current price P(0), = D1/(1+k) +D2/(1+k)^2 + D3/(1+k)^3 + D4/(1+k)^4 + P4/(1+k)^4 D1 = D0 * 1.25 = 1.25*1.25 = 1.25^2 D2 = 1.25D1 = 1.25^3 D3 = 1.25D2 = 1.25^4 D4 = 1.25D3 = 1.25^5 D5 = 1*D4 = 1.25^5 (g = 0, so (1+g) =1) P4 = D5/k = 1.25^5/0.096 So, P(0) = 1.25^2/1.096 +1.25^3/1.096^2 +1.25^4/1.096^3 +1.25^5/1.096^4 +1.25^5/(0.096*1.096^4) = 29.05
I am sure this would help...
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