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

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