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...

a k e 06 1012 06 12 P 0 412 03 4444 At a price of 40 the stock seems to be undervalued b If i ...

Tucker Manufacturing Company has a beta estimated at 1.0. The risk-free rate is 6 percent and the

Question:

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 next year (D1 = $4). This 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?

Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...