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    You are considering an investment in the common stock of Keler Corp. The stock is expected to pay a dividend of $2 per share at the end of the year (D1= $2.00). The stock has a beta equal to .9. The risk free rate is 5.6% and the market risk premium is 6 %. The stock's dividend is expected to grow at some constant rate g. The stock currently sells for $25 per share. Assuming the market is in equilibrium, what does the market believe will be the stock price at the end of 3 years? (What is P3?)

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    Solution Preview

    risk free rate= r f = 5.6%

    market risk premium is =(rm-rf)= 6%

    Therefore rm = 11.6%

    CAPM (Capital Asset Pricing Model equation is:

    r A= r f + beta A (r m - r f)

    risk free rate= r f = 5.6% (given)

    beta of stock= beta A= 0.9 (given)

    return on ...

    Solution Summary

    The solution calculates stock value of Keler Corp. using the dividend discount model. The required rate of return on stock is calculated using CAPM. It calculates the stock price three years from now.