you are considering an investment in Keller corporation’s stock, A Toal 40 point
ID: 2802081 • Letter: Y
Question
you are considering an investment in Keller corporation’s stock, A Toal 40 points (10 points) You are considering an investment in Keller Corporation's stock,which is expected to pay a dividend of $2.00 a share at the end of the year (D1 $2.00) and has a beta of 0.85. The risk-free rate is 5.5%,and the market risk premium is 6%. Keller currently sells for $35.00 a share, and its dividend is expected to grow at some constant rate g. Assuming the market is in quilibrium, what does the market believe will be the stock price at the end of years?Explanation / Answer
Calculating the required rate of return = Risk free rate + beta * market risk premium
= 5.5%+0.85*6%
= 10.60%
Calculating the growth rate
Rate = (D1/P0) + g
Solving for g
10.6% = (2/35) + g
g = 10.6% - 5.71%
g = 4.89%
P3 = P0*(1+g)^3
= 35*(1+4.89%)^3
= $40.38
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