You are considering an investment in Crisp\'s Cookware\'s common stock. The stoc

Question

You are considering an investment in Crisp's Cookware's common stock. The stock is expected to pay a dividend of $2.75 a share at the end of the year (D1 = $2.75); its beta is 0.95; the risk-free rate is 4.4 %; and the market risk premium is 6%. The dividend is expected to grow at some constant rate g, the stock currently sells for $41 a share. Assuming the market is in equilibrium, what does the market believe will be the stock price at the end of 3 years (i.e., what is P ? ?3 )? Round your answer to the nearest cent

Explanation / Answer

Required rate of return = Risk-free rate + beta*Risk premium
Required rate of return = 4.4% + 0.95 * 6%
Required rate of return = 10.1% = 0.101

Constant growth rate,
g = k - D1/P
g = 0.101 - 2.75/41
g = 0.0339 or 3.39
Stock price at the end of 3 years = $41*(1.0339)3
Stock price at the end of 3 years = $45.32
Stock Price = $45.32

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