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You are considering an investment in Keller Corp's stock, which is expected to pay a dividend of $2 a share at the end of the year and has a beta of 14
You are considering an investment in Keller Corp's stock, which is expected to pay a dividend of $2 a share at the end of the year and has a beta of 14.50. The risk-free rate is 19.20%, and the market risk premium is 6% Keller currently sells for $161 a share, and its dividend is expected to grow at some constant rate g. Assuming the market is in equilibrium, what does the market believe will be the stock price at the end of 3 years?
Expert Solution
Required rate = Risk free rate + beta(market risk premium)
Required rate = 19.2% + 14.5(6%)
Required rate = 106.2%
Required rate = (Year 1 dividend / price) + growth rate
1.062 = (2 / 161) + growth rate
growth rate = 1.04958 or 104.958%
Price at the end of 3 years = Current price (1 + rate)^periods
Price at the end of 3 years = 161 (1 + 1.04958)^3
Price at the end of 3 years = 161 * 8.6098
Price at the end of 3 years = $1,386.18
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