GeKay Inc. currently (January 1) has a net income of $10,000,000 which is expected to grow indefinitely (perpetuity) at 10% per annum. The firm is financed at a debt-to -value ratio of 30%. The firm has a 50% dividend payout to shareholders (dividends paid at year-end), with 10m shares of common stock outstanding. The firm pays taxes at the 36% rate. The stock has a (levered) beta of 1.2 and the market risk premium (MRP) is 6%. The risk free rate (RF) is 4% and the firm’s Cost of Debt is 5.5%. Determine the stock price?
The question belongs to Finance and it discusses about calculation of stock price with net income, debt to value ratio, dividend payout ratio and tax rate being given. The solution has detailed calculations.
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