Question

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, g_L, 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 the end of 3 years (i.e., what is )? Do not round intermediate calculations. Round your answer to the nearest cent

Answer 1

Solution:
	Expected rate of return or Cost of equity:	Risk free return + Beta (Market Risk Premium)
	Expected rate of return or Cost of equity:	0.026 + 0.9 * 0.05
	Expected rate of return or Cost of equity:	0.071	or 7.10%
	Current Stock Price :	Expected Dividend / (Cost of Capital - Growth Rate)
		$ 80 :	$ 3 /( 0.071-Growth Rate)
		Growth Rate:	0.0335 or 3.35%
	Hence, Stock price at the end of 3 year:	Current Price * (1 + Growth Rate)^3
	Hence, Stock price at the end of 3 year:	$ 80 * (1 + 0335)^3
	Hence, Stock price at the end of 3 year:	$ 80 * (1 + 0335)^3
	Hence, Stock price at the end of 3 year:	$ 88.32

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