Question
Company X has a beta of 1.08, the risk-free rate of interest is currently 2.5%, and the expected return on the market portfolio is 7.5%.
Company X has a beta of 1.08, the risk-free rate of interest is currently 2.5%, and the expected return on the market portfolio is 7.5%. The company plans to pay a dividend of $2.73 per share in the coming year and anticipates that its future dividends will increase at a constant annual rate consistent with that experienced over the 2017-2019 period shown below.
Year | Dividend |
2017 | 2.35 |
2018 | 2.45 |
2019 | 2.60 |
a. Determine the required return for this stock using the Capital Asset Pricing Model (CAPM).
b. Calculate the compounding growth rate of the dividends from 2017 to 2019 (N=2 years) for Company X using the recent dividends, shown in the table above.
c. Estimate the value of Company X's stock using the answers provided in parts a. and b., and the dividend constant growth model.
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