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

Question

You are considering an investment in the common stock of Crisp's Cookware. The stock is expected to pay a dividend of $1.80 a share at the end of the year (D1=1.80). The stock has a beta of 0.8. The risk-free rate is 3.5%, and the market expected return is 9.5%. The stock's dividend is expected to grow at some constant rate g. The sock currently sells for $26 a share. Assuming the market is in equilibrium, what does the market believe will be the stock price at the end of 5 years?

r(i) = r(f) + beta(i)*[r(m) - r(f)]

r(i) = D(1)/P(0) + g

P(t) = P(0)*(1+g)

Explanation / Answer

Calculate (r) using CAPM:

[r(m) - r(f)]

9.50%

beta(i)

0.8

r(f)

3.50%

r(i) = r(f) + beta(i)

Calculate (r) using CAPM:

[r(m) - r(f)]

9.50%

beta(i)

0.8

r(f)

3.50%

r(i) = r(f) + beta(i)

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