You are considering an investment in Justus Corporation's stock, which is expected to pay a dividend of $1.75 a share at the end of the year (D1 = $1.75) and has a beta of 0.9. The risk-free rate is 5.5%, and the market risk premium is 4.5%. Justus currently sells for $50.00 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?Cost of Equity:Cost of equity is the required return on a firm's equity by investors. One way to estimate the cost of equity for a firm is to use the capital asset pricing model (CAPM). The model measures the firm's risk using its beta, and then estimates the required return on equity as follows: required rate of return = risk free rate + beta * market risk premium.
