Crisp Cookware\'s common stock is expected to pay a dividend of $1.5 a share at
ID: 426463 • Letter: C
Question
Crisp Cookware's common stock is expected to pay a dividend of $1.5 a share at the end of this year (D1 = $1.50); its beta is 0.70; the risk-free rate is 2.8%; and the market risk premium is 6%. The dividend is expected to grow at some constant rate g, and the stock currently sells for $25 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
Required Rate of Return ROR =Market Risk Premium*Beta + Risk Free Rate
= 6*0.7 + 2.8 =7%
current price of stock (CP)= D1/ (ROR - g)
25=1.5 / ( 7 - g)
175 - 25g=1.5
growth rate ,g=6.94%
the stock's price at the end of 3 years = CP*(1+g)^3
=25*(1+0.0694)^3=30.57 or $ 31
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