Crisp Cookware\'s common stock is expected to pay a dividend of $1.5 a share at

Question

Crisp 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 0.70; the risk-free rate is 2.8%; 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 )? Do not round intermediate steps. Round your answer to the nearest cent

Explanation / Answer

P0 = D1 / (Ke - g)

or, $25 = $1.5 / (Ke - g)

From the CAPM formula, we know that Ke = Rf + beta * Risk premium = 0.028 + 0.70 * 0.06 = 0.07

So, $25 = $1.5 / (0.07 - g)

Solving gives us, g = 0.01

We have to find P3 which is equal to D4 / (Ke - g)

So, P3 = D0 * (1+g)^3 / (Ke - g) = 1.5 * 1.01^3 / (0.07 - 0.01) = $25.76

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