Sun TV Inc. is presently enjoying relatively high growth because of a surge in the demand...

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Sun TV Inc. is presently enjoying relatively high growth becauseof a surge in the demand for its new product. Management expectsearnings and dividends to grow at a rate of 22% for the next 4years, after which competition will probably reduce the growth ratein earnings and dividends to zero, i.e., g = 0. The company’s lastdividend, D₀, was $1.25, its beta is 1.20, the marketrisk premium is 5.50%, and the risk-free rate is 3.00%. What is thecurrent price of the common stock?
a.              $26.57
b.              $32.69
c.              $28.97
d.              $23.39
e.              $27.37

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Step 1 Calculationof cost of equity using Capital Asset Pricing ModelUsing Capital Asset Pricing ModelCost of Equity Ke Rf b Rm Rf WhereRf Risk free return 3b Beta See Answer

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Sun TV Inc. is presently enjoying relatively high growth becauseof a surge in the demand for its new product. Management expectsearnings and dividends to grow at a rate of 22% for the next 4years, after which competition will probably reduce the growth ratein earnings and dividends to zero, i.e., g = 0. The company’s lastdividend, D0, was $1.25, its beta is 1.20, the marketrisk premium is 5.50%, and the risk-free rate is 3.00%. What is thecurrent price of the common stock?a. $26.57b. $32.69c. $28.97d. $23.39e. $27.37