Constant Growth Valuation Crisp Cookware\'s common stock is expected to pay a di
ID: 2613354 • Letter: C
Question
Constant Growth Valuation
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 1.15; the risk-free rate is 5.2%; and the market risk premium is 5%. The dividend is expected to grow at some constant rate g, and the stock currently sells for $47 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
calculation of constant growth value
ke = Rf + beta (Rf - Rm)
= 5.2 + 1.15 ( 5)
= 10.95%
constant dividend :
P = D1 / ke
= 1.5/ 10.95
= 0.14
constant dividend growth :
p = D1 / (ke - g)
(ke - g) p = D1
(ke - g) = D1 / p
- g = D1 / p - Ke
- g = - 0.24
g = 24%
stock price of the share is more at end of the third year, because the growth rate is constant.