Crisp Cookware's common stock is expected to pay a dividend of $2.25 a share at the end of this year (D1 = $2.25)

Crisp Cookware's common stock is expected to pay a dividend of $2.25 a share at the end of this year (D₁ = $2.25); its beta is 0.70; the risk-free rate is 3.4%; and the market risk premium is 6%. The dividend is expected to grow at some constant rate g, and the stock currently sells for $39 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.

Solutions

Expert Solution

Required return=risk free rate+Beta*market risk premium

=3.4+(0.7*6)

=7.6%

Required return=(D1/Current price)+Growth rate

0.076=(2.25/39)+Growth rate

Growth rate=0.076-(2.25/39)

=0.0183076923

P3=Current price*(1+Growth rate)^3

=39*(1+0.0183076923)^3

=$41.18(Approx)

jeff jeffy answered 1 year ago

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