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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 companys beta is 1.15, the market risk premium is 5.50%, and the risk-free rate is 4.00%. What is the companys current stock price? Select one: a. $28.90 b. $29.62 c. $30.36 d. $31.12 e. $31.90

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Answer:

Dividend in 1 year's time(D1) = $1.25

Growth rate(g) = 6% = 0.06

Beta(β) = 1.15

Risk premium = 5.5%

Risk-free rate(Rf) = 4%

Ke = Rf  + β(Rm – Rf)

Ke = 4 + 1.15(5.5)

Ke = 4 + 6.325

Ke = 10.325%

Po = D1/Po + g

Po = 1.25/0.10325-0.06

Po = 1.25/0.04325

Po = $28.90

Explanation:

In this case, we need to calculate cost of equity based on capital asset pricing model.Thereafter, we will calculate the current market price of the stock as shown above.