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a ng.cengage.com Cengage MindTap Cengage Learning Cengage MindTap-Ce NDTAP Q Search this course 0 cengage Check My Work 9-5: Constant Growth Stocks Problem Walk-Through Constant growth You are considering an investment in Keller Corp's stock, which is expected to pay a dividend of $2.00 a share at the end of the year (D1-$2.00) has a beta of 0.9. The risk-free rate is 5.8%, and the market risk premium is 45%. Keller currently sells for $27,00 a share, and its dividend is expected to grow at some constant rate g. Assuming the market is in equlibrium, what does th market believe will be the stock price at the end of 3 years? (That is, what is Ps ?) Round your answer to two decimal places 3.09 3 Hide Feedback Incorrect Check My Worl Problem 9.13 s Question9 Save Submit Assignment for Gra

Explanation / Answer

Beta = 0.9

Market Risk PRemium = 4.5%

Risk Free Rate = 5.8%

Cost of Equity = 5.8% + 0.9 * 4.5%

Cost of Equity = 9.85%

Current Price = 27

D1 = 2

27 = D1/ (Cost of Equity - Growth Rate)

27 = 2/ (9.85% - Growth Rate)

Growth Rate = 2.44%

D4 = 2 * (1 + 2.44%)3

D4 = 2.150164

P3 = D4/ (Cost of Equity - Growth rate)

P3 = 2.150164/ (9.85% - 2.44%)

P3 = 29.03

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