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    natka's Avatar
    natka Posts: 4, Reputation: 2
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    #1

    Nov 16, 2010, 06:58 PM
    How to solve this problem ?
    You are considering an investment in Keller Corps stock, which is expected to pay a dividend of $2.75 a share at the end of the year (D1 = $2.75) has a beta of 0.9. The risk-free rate is 4.9%, and the market risk premium is 4.7%. Keller currently sells for $32.00 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?
    ArcSine's Avatar
    ArcSine Posts: 969, Reputation: 106
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    #2

    Nov 17, 2010, 03:24 PM
    Using the Gordon-Shapiro constant-growth model, the supplied info gives



    First use Keller's beta, the market's risk-free rate, and the market's risk premium to determine the appropriate discount rate r to use in the model. The model will then have only one unknown g (Keller's growth rate as viewed by the market), which you can then solve the equation for.

    Having determined g, then the expected stock price at the end of three years will simply be .
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