Question

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?

Answer 1

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