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    Calculating expected price of a common stock

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    You are considering an investment in the common stock of Crisp 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 P3?)

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    Solution Preview

    Beta of stock=b=0.9
    Risk free rate=rf=5.6%
    Market risk premium=rp=6%

    CAPM Model gives us,
    Required rate of return=r=rf+b*rp=5.6%+0.9*6%=11%

    Current price of ...

    Solution Summary

    Solution describes the steps to find out the expected price of a common stock at the end of 3 years.

    $2.19

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