risp Cookware\'s common stock is expected to pay a dividend of $1.5 a share at t
ID: 2808089 • Letter: R
Question
risp Cookware's common stock is expected to pay a dividend of $1.5 a share at the end of this year (D1 = $1.50); its beta is 0.9. The risk-free rate is 4% and the market risk premium is 4%. The dividend is expected to grow at some constant rate g, and the stock currently sells for $50 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 calculations. Round your answer to the nearest cent.
Explanation / Answer
Required return=Risk free rate+Beta*Market risk premium
=4+(0.9*4)=7.6%
Required return=(D1/Current price)+Growth rate
0.076=(1.5/50)+Growth rate
Growth rate=0.076-0.03
=4.6%
We use the formula:
A=P(1+r/100)^n
where
A=future value
P=present value
r=rate of interest
n=time period.
Hence P3=$50*(1.046)^3
=$50*1.144445336
which is equal to
=$57.22(Approx).
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