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 1.15, 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

The correct answer is A because the current stock price is $28.90. This can be calculated using the Gordon Growth Model, which is:P0 = D1 / (r - g)where:P0 is the current stock priceD1 is the expected dividend at the end of the yearr is the required rate of returng is the expected growth rate of the dividendIn this case, D1 = $1.25, r = 4.00% + 1.15 * 5.50% = 9.78%, and g = 6.00%. Plugging these values into the formula, we get:P0 = $1.25 / (0.0978 - 0.06) = $28.90

Francis Company Is Expected to Pay a Dividend of D1