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I worked out this answer and just need to know if the end results are...

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Accounting

I worked out this answer and just need to know if the end results are correct

P722 Integrative: Risk and valuation Given the following information for the stock of Foster Company, calculate the risk premium on its common stock.

Current price per share of common

$50.00

Expected dividend per share next year

$ 3.00

Constant annual dividend growth rate

6.5%

Risk-free rate of return

4.5%

Constant growth model also referred to as the Gordon model is used to find the value of constant growth stock.

P0 = D0(1 + g)/(rs g) = D1/(rs g)

D1 = next expected divided

Rs = the required rate of return

g the constant growth rate

P0 Current Price

Solution

Part 1

Using constant growth model, the expected rate of return

rs= D1/P0 + g

Current price, P0= $50.00

Growth rate, g = 6.5%

Expected dividend, D1= $3.00

Expected rate of return (rs) = $3/$50 + 6.5%

=6+6.5

= 12.5%

Part 2

Risk-free rate, rRF=4.5%

Expected rate of return, rs=12.5%

The equation is as follows: rs = rRF+RP

12.5% = 4.5% + RP

12.5%-4.5%= RP

Therefore, risk premium is 8%.

Answer & Explanation Solved by verified expert
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