Constant Growth Valuation Crisp Cookware\'s common stock is expected to pay a di

Question

Constant Growth Valuation Crisp Cookware's common stock is expected to pay a dividend of $1.75 a share at the end of this year (D1 = $1.75); its beta is 0.70; the risk-free rate is 5.2%; and the market risk premium is 5%. 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

Expected return for the stock = 5.2% + 0.70*(5%)

=5.2% +3.5%

=8.7%

g= r -Dvidend Yield

= 8.7% -5.3%

3.40%

Dividend at end of year 4

= 1.75*(1.034)^3

=1.93

Stock price = Dividend/(r-g)

= 36.481

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