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 1.15; the risk-free rate is 5.3%; and the market risk premium is 6%. The dividend is expected to grow at some constant rate g, and the stock currently sells for $25 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

Rs = Rf+ [Beta * market premium ]
       = 5.3 + [1.15 * 6 ]
       = 5.3 + 6.9
       = 12.2%

G= Rs- (D1/price)
= .122 - (2.25 / 25)
= .122 - .09
= .032 or 3.2%

D4 = D1(1+g)^n
   = 2.25 (1+.032)^3
   = 2.25 (1.032)^3
   = 2.25 * 1.09910
   = 2.4730

P3 = D4/ (Rs-g)
= 2.4730 / (.122- .032)
   =2.4730 / .09
   = $ 27.48 per share

Rs = Rf+ [Beta * market premium ]
       = 5.3 + [1.15 * 6 ]
       = 5.3 + 6.9
       = 12.2%

G= Rs- (D1/price)
= .122 - (2.25 / 25)
= .122 - .09
= .032 or 3.2%

D4 = D1(1+g)^n
   = 2.25 (1+.032)^3
   = 2.25 (1.032)^3
   = 2.25 * 1.09910
   = 2.4730

P3 = D4/ (Rs-g)
= 2.4730 / (.122- .032)
   =2.4730 / .09
   = $ 27.48 per share

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