Constant Growth Valuation Crisp Cookware\'s common stock is expected to pay a di
ID: 2618644 • Letter: C
Question
Constant Growth Valuation
Crisp Cookware's common stock is expected to pay a dividend of $3 a share at the end of this year (D1 = $3.00); its beta is 1.00; the risk-free rate is 3.5%; and the market risk premium is 5%. The dividend is expected to grow at some constant rate g, and the stock currently sells for $39 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 P^3 )? Do not round intermediate steps. Round your answer to the nearest cent.
$
Explanation / Answer
Required return=Risk free rate+Beta*MArket risk premium
=3.5+(1*5)=8.5%
Required return=(D1/Current price)+Growth rate
0.085=(3/39)+Growth rate
Growth rate=0.085-(3/39)
=0.807692307%(Approx)
We use the formula:
A=P(1+r/100)^n
where
A=future value
P=present value
r=rate of interest
n=time period.
P3=$39(1+0.00807692307)^3
which is equal to
=$39.95(Approx).