Hi, I am trying to solve this problem, looking up solutions on Chegg but the ans

Question

Hi, I am trying to solve this problem, looking up solutions on Chegg but the answer does not match. Problem : 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 0.85. The risk-free rate is 4.7% and the market risk premium is 5%. The dividend is expected to grow at some constant rate gL, and the stock currently sells for $40 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. My answer is $43.58. I am trying to follow the steps in http://www.chegg.com/homework-help/questions-and-answers/crisp-cookware-s-common-stock-expected-pay-dividend-225-share-end-year-d1-225-beta-100-ris-q5918031 Any help appreciated

Explanation / Answer

with help of capm model we will first try to find out cost of capital ke

=Rf + B(Rm - Rf)

rm -rf = market risk premium

=4.7 + 0.85(5)

=9%

now we use gordern growth model to find g

ke = D1/P +g
0.09=1.75/40 + g

g = 0.04625 or 4.63%

to find price of stock at the end of 3 yr we use constant growth model

pt = dt+1/ ke -g

dt+1 =dt(1+g)

p3 = d4/ke-g

p3 = d1(1.0463)^3 / 0.09 -0.0463

=1.75(1.145266)/0.0437

=2.004216/0.0437

=45.86306 or 45.86

the answer should be around 45.86

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