You are looking to figure out what a company’s stock price should be. It is expected to pay a dividend of $10 per share next year, and grow that dividend at a rate of 2% each year after that. The financial analyst that you hired crunched some numbers, and is confident that the beta of the stock is 0.8. The current risk-free interest rate is 1%, and the market return is 10%.
(a) What should the company’s stock price be?
(b) Suppose that your analyst made a mistake, and the beta of the stock is actually 1.2. What should the company’s stock price be now?
Please show all work.