Crisp Cookware\'s common stock is expected to pay a dividend of $2.75 a share at

Question

Crisp Cookware's common stock is expected to pay a dividend of $2.75 a share at the end of this year (D1 = $2.75); its beta is 0.75; the risk-free rate is 4.9%; 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  )? Do not round intermediate steps. Round your answer to the nearest cent

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Required Rate of Return = Risk Free Rate + Beta*Market Risk Premium = 4.9 + .75*6 = 9.4%

Current Stock Price = Expected Dividend (D1)/(Required Rate of Return - Growth Rate) = 2.75/(9.4% - Growth Rate)

32*9.4% - 32*Growth Rate = 2.75

Growth Rate = (3.008 - 2.75)/32

Growth Rate = .80625%

Stock Price at the End of 3 Years = Current Stock Price*(1+Growth Rate)^3 = 32*(1+.80625%)^3 = $32.78 or $32.7 or $33.

Answer is $32.78 or $32.7 or $33.

Thanks.

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