Constant Growth Valuation Crisp Cookware\'s common stock is expected to pay a di
ID: 2759594 • Letter: C
Question
Constant Growth Valuation Crisp Cookware's common stock is expected to pay a dividend of $1.75 a share at the end of this year (D1 = $1.75); its beta is 0.70; 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 $33 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
Expected return for the stock = 5.2% + 0.70*(5%)
=5.2% +3.5%
=8.7%
g= r -Dvidend Yield
= 8.7% -5.3%
3.40%
Dividend at end of year 4
= 1.75*(1.034)^3
=1.93
Stock price = Dividend/(r-g)
= 36.481