D1 = $ 2.75, Beta = B = 0.9, Risk-Free Rate = Rf = 5.4 % and Market Risk Premium = 6 % = MRP
Using, CAPM Cost of Equity = r = Rf + B x MRP = 5.4 + 0.9 x 6 = 10.8 %
Current Stock Price = P0 = $ 37
Therefore, Constant Growth Rate = g = r - (D1/P0) = 0.108 - (2.75/37) = 0.0336757 or 3.36757 % ~ 3.37 %
D4 = D1 x (1.0337)^(3) = 2.75 x (1.0337)^(3) = $ 3.0372853
P3 = D4 / (r-g) = 3.0372853 / (0.108 - 0.0337) = $ 40.865293 ~ $ 40.86
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