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 $2.5 a share at the end of the year (D1 = $2.50); its beta is 0.90; the risk-free rate is 4.2 %; and the market risk premium is 6%. The dividend is expected to grow at some constant rate g, the stock currently sells for $45 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. The correct answer is 50.68, but I keep coming up with 50.06.

Explanation / Answer

Ke = 4.2 + .9*(6) = 9.6 45 = 2.5/.096-g 4.32 - 45g = 2.5 g= 4.04% or 4% P3 = 45*(1+.0404)^3 = 50.68

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