on jun 24 at 6 PM EDT Sore: 0.00% Seve Check My Work (1 remaining) o Constant gr
ID: 2617317 • Letter: O
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on jun 24 at 6 PM EDT Sore: 0.00% Seve Check My Work (1 remaining) o Constant growth Justus Corporation's stock which is expected to pay a dividend of $2.25 a share at the end of the year (D1 -$2.25) and has a beta of premium is 5.5%. Justus currently sells for $25.00 a share, and its dividend is expected to grow at some 0.9. The risk-free rate is 4.6%, and the market risk O Assuming the market is in equibrium, what does the market believe will be the stock price at the end of 3 years? (That is, what is P , ) Round your answer to two decimal places. Check My Work (a remaining) 21Explanation / Answer
Cost of Equity as per CAPM( Ke )= Risk free rate + Beta * Risk premium = 4.6% + 0.9 * 5.5% = 9.55%
Growth =g
Price of Share = D1/(Ke - g)
25 = 2.25 /(9.55% - g)
g = 9.55% - 2.25/25 = 0.55%
Best of Luck. God Bless
Price of Share at year 3 = D1 * ( 1+g)3/(r -g) = 2.28733/(9.55%-0.55%) = $25.41
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