Frazier Manufacturing paid a dividend last year of $2, which is expected to grow at a constant rate of 5%. Frazier has a beta of 1.3. If the market is returning 11% and the risk-free rate is 4%, calculate the value of Frazier's stock.
A)$25.93
B)$31.33
C)$38.53
D)$41.63

Question

Quizplus · Accepted Answer

The correct answer is A because the value of Frazier's stock is $25.93. This is calculated using the Gordon Growth Model, which is:```Stock Price = Dividend / (Required Rate of Return - Growth Rate)```In this case, the dividend is $2, the required rate of return is 11% (the market return plus the beta of 1.3 times the risk-free rate of 4%), and the growth rate is 5%. Plugging these values into the formula, we get:```Stock Price = $2 / (0.11 - 0.05) = $25.93```

Frazier Manufacturing Paid a Dividend Last Year of $2, Which