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. The dividend discount model is used to calculate the current stock price. The formula for the dividend discount model 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, the expected dividend at the end of the year is $1.25, the expected growth rate of the dividend is 6.00%, the required rate of return is 10.50% (4.00% + 5.50% * 1.15), and the current stock price is $28.90.

The Francis Company Is Expected to Pay a Dividend of D1

The Francis Company Is Expected to Pay a Dividend of D₁