Crisp Cookware\'s common stock is expected to pay a dividend of $2.5 a share at

Question

Crisp Cookware's common stock is expected to pay a dividend of $2.5 a share at the end of this year (D1 = $2.50); its beta is 1.20; the risk-free rate is 4.5%; and the market risk premium is 6%. The dividend is expected to grow at some constant rate g, and the stock currently sells for $33 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:

Step 1: Calculate Required Rate of Return

Required Rate of Return = Risk Free Rate + Beta*(Market Risk Premium) = 4.50 + 1.20*(6) = 11.70%

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Step 2: Calculate Growth Rate

Current Stock Price = D1/(Required Rate of Return - Growth Rate)

33 = 2.50/(11.70% - Growth Rate)

33*11.70% - 33*Growth Rate = 2.50

Growth Rate = (33*11.70% - 2.50)/33 = 4.12%

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Step 3:

Calculate Stock Price after 3 Years = Current Stock Price*(1+Growth Rate)^3 = 33*(1+4.12%)^3 = $37.25 or $37.3 or $37

Answer is $37.25 or $37.3 or $37.

Thanks.

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