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 1.15, 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:Stock Price = Dividend / (Required Rate of Return - Growth Rate)Required Rate of Return = Risk-Free Rate + Beta * Market Risk PremiumRequired Rate of Return = 4.00% + 1.15 * 5.50% = 9.28%Stock Price = $1.25 / (0.0928 - 0.06) = $28.90

The Francis Company Is Expected to Pay a Dividend of D1