Crisp Cookware's common stock is expected to pay a dividend of $2 a share at the end of this year (D1 $2.00); its beta is 0.8.

Crisp Cookware's common stock is expected to pay a dividend of $2 a share at the end of this year (D1 $2.00); its beta is 0.8. The risk-free rate is 5.3% and the market risk premium is 6%. The dividend is expected to grow at some constant rate, gL, 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?

Solutions

Expert Solution

Computation of the price of stock after 3 years is shown as follows:

Information given in question:

D₁ = $2.00

Beta = 0.8

Risk free rate = 5.3%

Market risk premium = 6%

Current price (i.e. P₀) = $50

Ke(Cost of equity) as per CAPM = risk free rate + beta * market risk premium

= 5.3% + 0.8 * 6%

= 5.3% + 4.8%

= 10.1%

Ke = (D₁ / P₀ ) + g

10.1% = ($2 / $50) + g

10.1% = 4% + g

Hence “g” or growth = 10.1% – 4%

= 6.1%

Stock price at the end of 3 years is:

P₃ = D₄ / (Ke – g)

= $2 * (1 + 6.1%)³ / (10.1% – 6.1%)

= $2 * (1.061)³ / 4%

= $2.3887 / 4%

= $59.71

ekkarill92 answered 1 year ago

Next > < Previous

Related Solutions

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...

- A stock expects to pay a year-end dividend of $2.50 a share (i.e., D1 =...

- A stock expects to pay a year-end dividend of $2.50 a share (i.e., D1 = $2.50); assume that last year’s dividend has already been paid). The dividend is expected to decline 5 percent a year, forever (i.e., g = -5%). The company’s expected and required rate of return is 12 percent. What is the current market price per share of this stock? - The expected rate of return on the common stock of Northwest Corporation is 10 percent. The...

A stock is trading at $90 per share. The stock is expected to have a year-end dividend of $2 per share (D1 = $2)

A stock is trading at $90 per share. The stock is expected to have a year-end dividend of $2 per share (D1 = $2), and it is expected to grow at some constant rate g throughout time. The stock's required rate of return is 12% (assume the market is in equilibrium with the required return equal to the expected return). What is your forecast of g? Round the answer to three decimal places.%

Constant Dividend Growth Valuation Crisp Cookware's common stock is expected to pay a dividend of $3...

Constant Dividend Growth Valuation 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 0.9. The risk-free rate is 2.6% and the market risk premium is 5%. The dividend is expected to grow at some constant rate, gL, and the stock currently sells for $80 a share. Assuming the market is in equilibrium, what does the market believe will be the stock's price at...

Glaham Restaurants expects to pay a common stock dividend of $1.50 per share next year (d1)....

Glaham Restaurants expects to pay a common stock dividend of $1.50 per share next year (d1). Dividends are expected to grow at a 4% rate for the foreseeable future. Glaham’s common stock is selling for $18.50 per share and issuance costs are $3.50 per share. What is Glaham’s cost of external equity? 20.59% 12.11% 14.00% 10.00%

Elvis Inc. common stock is expected to pay their first dividend of $2 at the end...

Elvis Inc. common stock is expected to pay their first dividend of $2 at the end of two years from today. Once the firm starts paying dividends, analysts expect the dividends to grow at a supernormal rate of 8% for the next year, and then attain a constant growth of 2% forever thereafter. The required rate of return on the stock is 7.5%. a) What is the value of Elvis Inc.'s stock today? b) In addition to the regular dividend...

Jedi Corp. common stock is expected to pay their first dividend of $2 at the end...

Jedi Corp. common stock is expected to pay their first dividend of $2 at the end of two years from today. Once the firm starts paying dividends, analysts expect the dividends to grow at a supernormal rate of 8% for the next year, and then attain a constant growth of 2% forever thereafter. The required rate of return on the stock is 7.5%. a) What is the value of Jedi’s stock today? b) In addition to the regular dividend stream,...

A stock is expected to pay a dividend of $0.71 at the end of the year....

A stock is expected to pay a dividend of $0.71 at the end of the year. The dividend is expected to grow at a constant rate of 7.9%. The required rate of return is 12.3%. What is the stock's current price? Note: Enter your answer rounded off to two decimal points. Do not enter $ or comma in the answer box. For example, if your answer is $12.345 then enter as 12.35 in the answer box.

A stock is expected to pay a dividend of $1.06 at the end of the year....

A stock is expected to pay a dividend of $1.06 at the end of the year. The dividend is expected to grow at a constant rate of 7.7%. The required rate of return is 10.3%. What is the stock's current price? Note: Enter your answer rounded off to two decimal points. Do not enter $ or comma in the answer box. For example, if your answer is $12.345 then enter as 12.35 in the answer box.

A stock is expected to pay a dividend of $1.25 at the end of the year...

A stock is expected to pay a dividend of $1.25 at the end of the year (i.e., D1 = $1.25), and it should continue to grow at a constant rate of 7% a year. If its required return is 12%, what is the stock's expected price 5 years from today? Do not round intermediate calculations. Round your answer to the nearest cent.

Subjects