a) A company has a beta of 1.6. The risk-free rate of return is 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 $3.00 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 6 percent per year forever. What is the firms current stock value? Use the required rate of return on the stock from (a).