1. You are considering an investment in Crisp\'s Cookware\'s common stock. The s
ID: 2698094 • Letter: 1
Question
1. You are considering an investment in Crisp's Cookware's common stock. The stock is expected to pay a dividend of $1.5 a share at the end of the year (D1 = $1.50); its beta is 0.80; the risk-free rate is 3 %; and the market risk premium is 6%. The dividend is expected to grow at some constant rate g, the stock currently sells for $32 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.
2.Woidtke Manufacturing's stock currently sells for $33 a share. The stock just paid a dividend of $2.75 a share (i.e., D0 = $2.75), and the dividend is expected to grow forever at a constant rate of 4% a year.
What is the required rate of return on the company's stock? Round the answer to the nearest hundredth.
Explanation / Answer
1. You are considering an investment in Crisp's Cookware's common stock. The stock is expected to pay a dividend of $1.5 a share at the end of the year (D1Â = $1.50); its beta is 0.80; the risk-free rate is 3 %; and the market risk premium is 6%. The dividend is expected to grow at some constant rate g, the stock currently sells for $32 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 P3 )? Round your answer to the nearest cent.
Required Rate of Return = 3+6*0.8 = 7.8%
Growth = 7.80%-1.5/32 =3.1125%
stock price at the end of 3 years(P3)= D4/(Re-g) = (1.50*1.031125^3)/(0.078-0.031125)
=1.6445/0.046875 = $35.08
2.Woidtke Manufacturing's stock currently sells for $33 a share. The stock just paid a dividend of $2.75 a share (i.e., D0Â = $2.75), and the dividend is expected to grow forever at a constant rate of 4% a year.
What is the required rate of return on the company's stock? Round the answer to the nearest hundredth.Â
required rate of return on the company's stock= (2.75*1.04)/33 + 0.04 = 0.12667 = 12.667%
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.