Final answer:
To estimate Stetson's expected stock price 6 years from now, one must calculate the required rate of return using the CAPM formula and then apply the Gordon Growth Model to find the present stock value, which can then be projected forward by growing it at a constant dividend growth rate over 6 years.
Step-by-step explanation:
The question is about calculating the expected stock price 6 years from now for Stetson, given certain financial metrics such as its current stock price, expected dividend, beta, risk-free rate, market risk premium, and dividend growth rate (g). The Gordon Growth Model (also known as the Dividend Discount Model) will be used to find the present value of all future dividends, which then can be projected forward to estimate the stock price in 6 years.
Firstly, we need to calculate the required rate of return using the Capital Asset Pricing Model (CAPM), which takes into account the risk-free rate, beta, and market risk premium. The formula for the required rate of return (k) is:
k = risk-free rate + (beta × market risk premium)
Then, we use the Gordon Growth Model to find the present value of the stock, which assumes that dividends grow at a constant rate (g) indefinitely:
P0 = D0 / (k - g)
Where P0 is the present value of the stock, D0 is the expected dividend, k is the required rate of return, and g is the growth rate of dividends. After calculating P0, we can find the future stock price (P6) by growing P0 at the rate of g over 6 years:
P6 = P0 × (1 + g)^6
It is important to find an appropriate growth rate (g) that reflects the expectations for the company's dividend growth. In calculating P6, it's assumed that the dividend growth rate remains constant over the period. Keep in mind that the actual future stock price may vary due to numerous factors that cannot be perfectly predicted.