Crisp Cookware\'s common stock is expected to pay a dividend of $1.75 a share at

Question

Crisp Cookware's common stock is expected to pay a dividend of $1.75 a share at the end of this year (D1 = $1.75); its beta is 0.80; the risk-free rate is 4.3%; and the market risk premium is 5%. The dividend is expected to grow at some constant rate g, and the stock currently sells for $29 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 return=Risk free rate+Beta*MArket risk premium

=4.3+(0.8*5)=8.3%

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

0.083=(1.75/29)+Growth rate

Growth rate=0.083-(1.75/29)

=0.022655172

We use the formula:
A=P(1+r/100)^n
where
A=future value
P=present value
r=rate of interest
n=time period.

Hence

P3=$29(1+0.022655172)^3

=$31.02(Approx).

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