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