Final answer:
To estimate the stock price of Justus Corporation at the end of 3 years, we use the Gordon Growth Model and the CAPM to find the required rate of return. We then apply the dividend growth rate of 9% to predict the future value of the stock, resulting in a calculated price of approximately $261.44.
Step-by-step explanation:
The question pertains to estimating the future stock price of Justus Corporation using the Gordon Growth Model (a model to determine the present value of a stock based on its next period's dividends that are expected to grow at a constant rate). Given that the stock's expected dividend at the end of the year (D1) is $2.00, the constant growth rate (g) is 9%, the beta is 0.9, the risk-free rate is 5.9%, and the market risk premium is 4%, we can calculate the required rate of return using the Capital Asset Pricing Model (CAPM).
Using CAPM, the required rate of return (k) is calculated as:
k = risk-free rate + (beta * market risk premium) = 5.9% + (0.9 * 4%) = 9.5%
With the dividend growth rate and required rate of return, we can now find the expected stock price at the end of 3 years (P3) using the Gordon Growth Model formula:
P3 = D1 * (1 + g)^3 / (k - g) = $2.00 * (1 + 0.09)^3 / (0.095 - 0.09) = $261.44 approx.