Constant Growth Valuation Crisp Cookware\'s common stock is expected to pay a di
ID: 2749730 • Letter: C
Question
Constant Growth Valuation Crisp Cookware's common stock is expected to pay a dividend of $2.75 a share at the end of this year (D1 = $2.75); its beta is 1.15; the risk-free rate is 4.4%; and the market risk premium is 5%. The dividend is expected to grow at some constant rate g, and the stock currently sells for $45 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? Do not round intermediate steps. Round your answer to the nearest cent.
Explanation / Answer
ke = Rf + Beta(Risk Prem) ke = 4.4% + 1.15(5%) ke = 4.4% + 5.75% ke = 10.15% Price 45.00 D1 2.75 ke = D1/P0 + g 10.15% = 2.75/45 + g 10.15% = 6.11% + g g = 4.04% P3 = D4/(ke-g) P3 = 2.75*1.0404*1.0404*1.0404/(10.15% - 4.04%) P3 = 3.10/6.11% P3 = $50.74