Crisp Cookware\'s common stock is expected to pay a dividend of $2.25 a share at

Question

Crisp Cookware's common stock is expected to pay a dividend of $2.25 a share at the end of this year (D1 = $2.25); its beta is 1.00; the risk-free rate is 5.7%; and the market risk premium is 6%. The dividend is expected to grow at some constant rate g, and the stock currently sells for $32 a share. Assuming the market is in equilibrium, what does the market believe will be the stock's price at the end of 3 years (i.e., what is P3 )? Do not round intermediate steps. Round your answer to the nearest cent.

Please explain your steps so I can understand how the answer was reached. Thank you!

Explanation / Answer

Cost of equity = 5.7% + 1*6% = 11.7%

32 = 2.25/(0.117 - g)

g = 4.67%

price at the end of 3 years = 32 * (1.0467^3) = 36.69

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