Crisp Cookware's common stock is expected to pay a dividend of $3 per share at the end of this year; its beta is 0.9; the risk-free rate is 5.2%; and the market risk permium is 6%. The dividend is expected to grow at some constant rate g, and the stock currently sells for $40 per share. What does the market believe will be the stock's price three years from now?

Question

Business

Jefferson Chambers

31 March, 01:13

Crisp Cookware's common stock is expected to pay a dividend of $3 per share at the end of this year; its beta is 0.9; the risk-free rate is 5.2%; and the market risk permium is 6%. The dividend is expected to grow at some constant rate g, and the stock currently sells for $40 per share. What does the market believe will be the stock's price three years from now?

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Ayaan Richard · Answer 1

The answer is $41.21

Explanation:

Required Rate of Return = Risk Free Rate + Beta * (Market Risk Premium) = 5.2% + 0.9 * 6% = 10.6%

Cost of Equity = D1/Current Stock Price + Growth Rate

10.6% = $3/$40 + g

g = 3.1%

Stock Price After 3 Years = Current Stock Price*Growth Rate = $40 * (1.031) = $41.21