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 0.75; the risk-free rate is 5.3%; and the market risk premium is 4%. The dividend is expected to grow at some constant rate g, and the stock currently sells for $43 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

Cost of Equity = Risk Free Rate + Beta * Market Premium = 5.3% + 0.75 * 4% = 8.3%

Cost of Share = D1/(Cost of Equity - Growth)
43 = D1/(8.3% - Growth)
43 = 1.75/(8.3% - Growth)
Growth = 8.3% - 1.75/43 = 4.23%

Price of share after 3 years = D1*(1+ growth)3/(Cost of Equity - Growth) = 48.69
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