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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 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?

Respuesta :

Answer:

$28.90

Explanation:

For computing the current stock price, first we have to determine the required rate of return which is shown below:

In this question, we apply the Capital Asset Pricing Model (CAPM) formula which is shown below

Expected rate of return = Risk-free rate of return + Beta × (Market rate of return - Risk-free rate of return)

= 4% + 1.15 × 5.50%

= 4% + 6.325%

= 10.325%

The (Market rate of return - Risk-free rate of return)  is also known as market risk premium

Now the current stock price would be

= Next year dividend ÷ (Required rate of return - growth rate)

= $1.25 ÷ (10.325% - 6%)

= $1.25 ÷ 4.325%

= $28.90