You are considering an investment in Justus Corporation's stock, which is expected to pay a dividend of $1 50 a share at the end of the year (D1 $1 50) and has a beta of 0 9 The risk free rate is 3 4 , and the market risk premium is 5 0 Justus currently sells for $35 00 a share, and its dividend is expected to grow at some constant rate, g The data has been collected in the Microsoft Excel Online file below Constant growth Expected year end dividend (D 1 ) $1 50 Beta coefficient 0 90 Risk free rate (r RF ) 3 40 Market risk premium (RP M ) 5 00 Current stock price (P 0 ) $35 00 Market in equilibrium Yes Formulas Calculate required return Required return on common stock N A Calculate constant growth rate, g Total return on common stock N A Expected dividend yield N A Expected capital gains yield N A Calculate stock price in 3 years, P 3 Number of years from today 3 Calculate P 3 using P 0 N A Alternative calculation Calculate P 3 using dividends N A 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 ) Round your answer to two decimal places Do not round your intermediate calculations

The Answer is in the image, click to view ...

Answered step by step

Verified Expert Solution

Link Copied!

Question

1 Approved Answer

Posted on Jul 28, 2024

You are considering an investment in Justus Corporation's stock, which is expected to pay a dividend of $1.50 a share at the end of the

You are considering an investment in Justus Corporation's stock, which is expected to pay a dividend of $1.50 a share at the end of the year (D1 = $1.50) and has a beta of 0.9. The risk-free rate is 3.4%, and the market risk premium is 5.0%. Justus currently sells for $35.00 a share, and its dividend is expected to grow at some constant rate, g. The data has been collected in the Microsoft Excel Online file below.

Constant growth

Expected year-end dividend (D₁)	$1.50
Beta coefficient	0.90
Risk-free rate (r_RF)	3.40%
Market risk premium (RP_M)	5.00%
Current stock price (P₀)	$35.00
Market in equilibrium	Yes
		Formulas
*Calculate required return:*
Required return on common stock		#N/A

*Calculate constant growth rate, g:*
Total return on common stock		#N/A
Expected dividend yield		#N/A
Expected capital gains yield		#N/A

*Calculate stock price in 3 years, P₃:*
Number of years from today	3
Calculate P₃ using P₀		#N/A

Alternative calculation:
Calculate P₃ using dividends		#N/A

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?) Round your answer to two decimal places. Do not round your intermediate calculations.