Crisp Cookware\'s common stock is expected to pay a dividend of $2.25 a share at

Question

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 1.00; the risk-free rate is 5.4%; and the market risk premium is 5%. The dividend is expected to grow at some constant rate g, and the stock currently sells for $48 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

First we have to calculate the cost of equity

Cost of equity = risk free rate + beta*(risk premium)

=5.4%+1*(5%)

=10.4%

Price of stock = dividened next year/(cost of equity - growth rate)

=>48 = 2.25*(1+g)/(10.4%-g)

=>g= 5.81%

Therefore price of stock after 3 years = 2.25*(1+5.81%)^3/(10.4%-5.81%)

=$58.07 is the stock price

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