The Francis Company is expected to pay a dividend of D₁ = $1.25 per share at the end of the year,and that dividend is expected to grow at a constant rate of 6.00% per year in the future.The company's beta is 1.70,the market risk premium is 5.50%,and the risk-free rate is 4.00%.What is the company's current stock price?

Question

Quizplus · Accepted Answer

Using the constant growth valuation model, we have:
P0 = D1 / (rs - g)
where:
D1 = expected dividend next year = $1.25 * (1 + 6.00%) = $1.325
rs = required return on equity = rf + beta * market risk premium
     = 4.00% + 1.70 * 5.50% = 13.45%
g = expected growth rate = 6.00%
Therefore:
P0 = $1.325 / (13.45% - 6.00%) = $17.01
Thus, the current stock price is $17.01. Option C is the correct answer.

The Francis Company Is Expected to Pay a Dividend of D1

The Francis Company Is Expected to Pay a Dividend of D₁