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Homework answers / question archive / The Francis Company is expected to pay a dividend of D1 = $1

The Francis Company is expected to pay a dividend of D1 = $1

Finance

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? A$28.90B$29.62C$30.36D$31.12E$31.90

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What is the company’s current stock price?
Answer: A. $28.90
 
Explanation:
Required rate of return = Risk-free rate + (Beta × Market risk premium)
Required rate of return = 4.00% + (1.15 × 5.50%)
Required rate of return = 10.325%
 
P0  = [D1 ÷ (r − g)]
P0  = = Current stock price
r   = = Required rate of return
g  = = Growth rate
D1  =  = Next year's dividend
 
P0  = [$1.25 ÷ (0.10325 − 0.06)]
P0  = ($1.25 ÷ 0.04325)
Stock price  = $28.90