Question 9 of 9 Check My Work O 9-5: Constant Growth Stocks Problem Walk-Through

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Question 9 of 9 Check My Work O 9-5: Constant Growth Stocks Problem Walk-Through Constant growth You are considering an investment in Keller Corp's stock, which is expected to pay a dividend of $2.50 a share at the end of the year (D1 $2.50) has a beta of 0.9. The risk-free rate is 3.3%, and the market risk premium is 5.5%. Keller currently sells for $39.00 a share, and its dividend is expected to grow at some constant rate g. Assuming the market is in equilibrium, what does the market believe will be the stock price at the end of 3 years? (That is, what is P3?) Round your answer to two decimal places 11:05 AM ll 7/24/2018

Explanation / Answer

Expected Dividend, D1 = $2.50
Current Price, P0 = $39.00

Required Return, r = Risk-free Rate + Beta * Market Risk Premium
Required Return, r = 3.30% + 0.90 * 5.50%
Required Return, r = 8.25%

Growth Rate, g = r - D1 / P0
Growth Rate, g = 0.0825 - $2.50 / $39.00
Growth Rate, g = 0.0825 - 0.0641
Growth Rate, g = 0.0184
Growth Rate, g = 1.84%

P3 = P0 * (1 + g)^3
P3 = $39.00 * (1 + 0.0184)^3
P3 = $39.00 * 1.0562
P3 = $41.19

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