Question

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 1.00; the risk-free rate is 4.3%; and the market risk premium is 5%. The dividend is expected to grow at some constant rate g, and the stock currently sells for $21 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.

Answer 1

Based on CAPM,

Required return on stock = Risk free rate + Beta * market risk premium

Required return on stock = 4.3% + (1 * 5%) = 9.30%

0.093 - g = 1.5/21

0.093 - g = 0.0714

g = 2.16%

D4 = 1.5 * (1 + 2.16%)3 = 1.5992