5.

a) A company has a beta of 1.5.The risk-free rateofreturnis 5 percent and the market risk premium is 6 percent.Find the required rate of return on the stock (i.e., the cost of equity capital).

b) The firm will pay a dividend of $4.00 per share next year.The firm will increase the dividend payment by $0.50 a share every year for the next 5 years (i.e., years 2 to 6).Thereafter, the dividends are expected to grow at 5 percent per year forever.What is the firm's current stock value?Use the required rate of return on the stock from (a).