You are considering an investment in Crisp\'s Cookware\'s common stock. The stoc

Question

You are considering an investment in Crisp's Cookware's common stock. The stock is expected to pay a dividend of $1.5 a share at the end of the year (D1 = $1.50); its beta is 1.20; the risk-free rate is 4.2 %; and the market risk premium is 4%. The dividend is expected to grow at some constant rate g, the stock currently sells for $33 a share. Assuming the market is in equilibrium, what does the market believe will be the stock price at the end of 3 years (i.e.,what is P^3 )? Round your answer to the nearest cent.

Explanation / Answer

E(R) = R(F) + R(M)* Beta E(R) = 4.2% + 4%(1.20) = 9% P0 = DIV1/r-g $33 = $1.50/.09 - g g = 0.0445 or 4.45% P3 = P0 *(1+g)^3 P3 = 33(1+0.0445)^3 = $37.60

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