Question

You are considering an investment in Justus Corporation's stock, which is expected to pay a dividend of $2.00 a share at the end of the year (D4 = $2.00) and has a beta of 0.9. The risk-free rate is 2.7%, and the market risk premium is 5.5%. Justus currently sells for $32.00 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. Open the spreadsheet and perform the required analysis to answer the question below. Open spreadsheet 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.

Answer 1

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- 2x 2 0.9 ke - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins % Cut Σ AutoSum : A Calibri -11AA = = = Dr Wrap Text General Ea Copy Fill Paste B I U B- A SF Merge Merge & Center - Center $ -% % 4:0 .00 . Conditional Format Format Painter Cell Insert Delete Format Sort & Find & Formatting as Table Styles Clear Filter Select Clipboard Font Alignment Number Styles Cells Editing A1 fx A B C D 1 2 3 D1 4 BETA 5 RF 2.70% 6 RPM 5.50% 7 PO 32 8 MARKET IN EQUILIBRIUM YES 9. 10 REQUIRED RETURN 11 REQUIRED RETURN ON COMMON STOCK 7.65% (=B5+B4*B6] 12 13 GROWTH RATE = g = 14 TOTAL RETURN ON COMMON STOCK 7.65% (=B11] 15 EXPECTED DIVIDEND YIELD 6.25% [=B3/B7] 16 EXPECTED CAPITAL GAIN YIELD 1.40% (=B14-B15] 17 18 STOCK PRICE IN YEAR 3 , P3 19 NO OF YEARS FROM TODAY 20 P3 USING PO 33.36 (=B7*(1+B16)^3] 21 PO*(1+g)^3 N D IR right clean YIELD bond portfolio cap stru WACC RESI ex div DIV POLICY NAME DIV YIELD ETEMADI 513 Sheet2 DOUBLE Sheet4 Sheets Sheet6 s7 58 59 Rea ferences BOI 120% . B 9 * 10 H ORGANI - ENG 23-11-2019

ke - Microsoft Excel (Product Activation Failed) Add-Ins File Home Insert Page Layout Formulas Data Review View - 2x % Cut Calibri Dr General -11AA = = = B- A Wrap Text Merge Merge & Center - Center B I U SF $ -% % 4:0 .00 . Insert Delete Format E Copy Paste Format Painter Clipboard A28 Conditional Format Formatting as Table Styles Cell Styles Σ AutoSum : A Fill Sort & Clear Filter Editing Find & Select Font Alignment Number Cells 7.65% (=B5+B4*B6] 7.65% (=B11] 6.25% (=B3/B7] 1.40% (=B14-B15] 9 10 REQUIRED RETURN 11 REQUIRED RETURN ON COMMON STOCK 12 13 GROWTH RATE = g = 14 TOTAL RETURN ON COMMON STOCK 15 EXPECTED DIVIDEND YIELD 16 EXPECTED CAPITAL GAIN YIELD 17 18 STOCK PRICE IN YEAR 3 , P3 19 NO OF YEARS FROM TODAY 20 P3 USING PO 21 22 ALTERNATIVE CALCULATION 23 P3 USING DIVIDEND 24 25 26 27 28 29 N DIR right clean YIELD bond portfolio Red ferences 33.36 [=B7*(1+B16)^3] PO*(1+g)^3 33.36 (=B3*(1+B16)^3/(B14-B16)] D1*(1+g)^3/(ke-g) H cap stru WACC RESI ex div DIV POLICY NAME DIV YIELD ETEMADI 513 Sheet2 DOUBLE Sheet4 Sheets Sheet6 s7 58 59 BO! 120% B 9 * 10 ORGANIC - -_+ . ENG 23-11-2019