Please show the work
Monk Corporation (MC) has recently paid an annual dividend of $1.50. The dividend is expected to increase forever at a 3.0% annual rate. MC’s beta is exactly 0.70. The riskless rate is 3% and the market risk premium is 6%. What is the expected value of MC shares in three years?
| Risk-free rate | 3% | |
| Market risk premium | 6% | |
| Beta | 0.7 | |
| Required return= | Risk-free rate + Beta * Market risk premium | |
| Required return= | 3%+0.7*6% | |
| Required return= | 7.200% | |
| D0= | $ 1.50 | |
| Growth rate | 3% | |
| Share price at T3 will require the dividend to be paid in year 4 | ||
| D4= | 1.50*(1+3%)^4 | |
| D4= | $ 1.69 | |
| Share price= | Next dividend/(Required return - Growth rate) | |
| Share price at T3= | 1.69/(7.20%-3%) | |
| Share price at T3= | $ 40.20 | |
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