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    Crisp's Cookware: Calculating the Market Price of a Company's Stock in 3 Years' Time

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    You are considering an investment in the common stock of Crisp's Cookware. The stock is expected to pay a dividend of $2 a share at the end of the year (D1 = $2.00). The stock has a beta equal to 0.9. 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 a share.

    Assuming the market is in equilibrium, what does the market believe will be the stock price at the end of 3 years? (That is, what is P1?)

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    Solution Preview

    We first calculate the growth rate g which is the capital gains yield - the rate at which the stock price will increase
    Using the dividend discount ...

    Solution Summary

    The solution explains how to calculate the market price of stock in 3 years with step-by-step calculations for ease of understanding.