Ask Question
16 July, 01:11

Crisp Cookware's common stock is expected t opay a dividend of $1.50 a share at the end of this year; its beta is 0.6. The risk free rate is 5.6% and the market risk premium is 4%. The dividend is expected to grow at some constant rate and the stock currently sells for $50 a share. Asuming the market is in equilibrium, what does the market believe will be the stock price at the end of 3 years

+1
Answers (1)
  1. 16 July, 02:19
    0
    Answer: $57

    Explanation:

    The following can be deduced from the question:

    The risk free rate = 5.6%

    The market risk premium = 4%

    The stick beta = 0.6

    The required return will be:

    = Risk free rate + (Beta * Market risk premium)

    = 5.6% + (0.6 * 4%)

    = 5.6% + 2.4%

    = 8% = 0.08

    Crisp Cookware's common stock is expected to pay a dividend of $1.50 a share at the end of this year, Therefore,

    D1 = $1.50

    The current stock price will now be:

    = D1 / (Required return - Growth rate)

    50 = 1.5 / (0.08 - growth rate)

    (0.08 - growth rate) = 1.5/50

    (0.08 - growth rate) = 0.03

    Growth rate = 0.08 - 0.03

    Growth rate = 0.05 = 5%

    D4 = D1 * (1+Growth rate) ³

    D4 = 1.5 * (1 + 0.05) ³

    D4 = 1.5 * (1.05) ³

    D4 = 1.5 * 1.1576

    D4 = $1.7364

    The stock price at the end of the year 3

    will be:

    = D4 / (Required return - Growth rate)

    = 1.7364 / (0.08 - 0.05)

    = 1.7364/0.03

    = $57

    The market believe that the stock price at the end of 3 years will be $57
Know the Answer?
Not Sure About the Answer?
Get an answer to your question ✅ “Crisp Cookware's common stock is expected t opay a dividend of $1.50 a share at the end of this year; its beta is 0.6. The risk free rate ...” in 📙 Business if there is no answer or all answers are wrong, use a search bar and try to find the answer among similar questions.
Search for Other Answers