Problem 7-9 Constant Growth Valuation Crisp Cookware\'s common stock is expected
ID: 2622092 • Letter: P
Question
Problem 7-9
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 1.10; the risk-free rate is 4.7%; 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 )? Do not round intermediate steps. Round your answer to the nearest cent.
$
Explanation / Answer
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 1.10; the risk-free rate is 4.7%; 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 )? Do not round intermediate steps. Round your answer to the nearest cent.
$ 46.92
Working:
Re = 4.7 + 5*1.1 = 10.20
Growth Rate = Re - (D1/P0 )
Growth rate = 10.20% - (1.50/39)
Growth Rate = 6.354%
stock's price at the end of 3 years = 39*1.06354^3
stock's price at the end of 3 years = $ 46.92