You are considering an investment in Keller Corp\'s stock, which is expected to

Question

You are considering an investment in Keller Corp's stock, which is expected to pay a dividend of $2.25 a share at the end of the year (D1 = $2.25) has a beta of 0.9. The risk-free rate is 4.9%, and the market risk premium is 4.0%. Keller currently sells for $39.00 a share, and its dividend is expected to grow at some constant rate g. Assuming the market is in equilibrium, what does the market believe will be the stock price at the end of 3 years? (That is, what is P^3 ?) Round your answer to two decimal places.

Explanation / Answer

expected return = risk-free rate + beta * (market risk premium)

=4.9+0.9*4 = 8.5%

Price = Next year dividend*/( required rate of return - growth rate)

39=2.25/(.055-growth rate)

growth rate = 2.73%

Price at end of year 3 = current price*(1+growth rate)^3

=39*(1+0.0273)^3

=42.28

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