You are considering an investment in the common stock of Cowher Corp. The stock

Question

You are considering an investment in the common stock of Cowher Corp. The stock is expected to pay a dividend of $2 per share at the end of the year (i.e., D1 = $2.0). The stock has a beta equal to 1.2. The risk free rate is 6 percent. The market risk premium is 5 percent. The stock's dividend is expected to grow at some constant rate, g. The stock currently sells for $40 a share. Assuming the market is in equilibrium, what does the market believe the stock price will be at the end of three years? What is p3?

Explanation / Answer

D1 2 Beta 1.2 Rf 6% Rm-Rf 5% Growth g Current price 40 Re 12% By reverse working we get g= Re - (D1/P0) 7% Thus, Market Price (2*1.07)/ (.12-/07) after 2nd year 42.8 Thus, Market Price 45.796 after 3rd year Please consider the time devoted to make this reply by rating this as 5 star. Thank u in advance. God bless u :)

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