Question

9-5: Constant Growth Stocks 11 Problem Walk-Through Constant growth You are considering an investment in Keller Corp's stock, which is expected to pay a dividend of $1.50 a share at the end of the year (D; - $1.50) has a beta 0.9. The r e mate 6.0, and the risk premium is 5.5%. Keller currently sells for $47.00 a share, and its dividend is expected to grow at some constant rate . Assuming the market in uirium, what does them stock price at the end of 3 years? (That is, what is Ps) Round your answer to two decimal places

Answer 1

Required return as per CAPM = Risk free rate + beta*market risk premium

= 6% + 0.9*5.5% = 10.95%

Price of share = Expected Dividend/(Required Return - Growth Rate)

47 = 1.5/(10.95%-growth rate)

g = 7.76%

Price after 3 years = Dividend in Year 4/(required Return - Growth rate)

= 2.0226/(10.95%-7.76%)

= $63.40