Crisp Cookware\'s common stock is expected to pay a dividend of $3 a share at th

Question

Crisp Cookware's common stock is expected to pay a dividend of $3 a share at the end of this year (D1 = $3.00); its beta is 0.7. The risk-free rate is 4.5% and the market risk premium is 5%. The dividend is expected to grow at some constant rate g, and the stock currently sells for $50 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 calculations. Round your answer to the nearest cent.

Explanation / Answer

Required rate on Equity = Risk Free Rate + Beta * Market Risk Premium

Required rate on Equity = 4.5% + 0.7 * 5%

Required rate on Equity = 8%

Price = 50

50 = D1/ (Required Rate - Growth Rate)

50 = 3/ (8% - Growth Rate)

Growth rate = 2%

Price at End of 3 years = D4/ (Required rate - Growth Rate)

Price at End of 3 years = 3 * (1 + 2%)3/ (6%)

Price at End of 3 years = 3.183624/ (6%)

Price at End of 3 years = 53.06

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