Tucker Manufacturing Company has a beta estimated at 1.0. The risk-free rate is 6 percent and the expected market return is 12 percent. Tucker expects to pay a $4 dividend next year (D1 = $4). This dividend is expected to grow at 3 percent per year for the foreseeable future. The current market price for Tucker is $40.
a. Is the current stock price an equilibrium price, based upon the SML calculation of ke for Tucker?
b. What do you think the appropriate equilibrium price is? How will that price be achieved?