1. Do the pricing at the end of 2019 using i) the formula and ii) the table method. Assume you are at the end of 2019. Therefore, your 1st future dividend will be one in the first quarter of 2020. You have quarterly compounding.

1. Calculate your cost of equity using the CAPM.

Cost of Equity = RFRate + Beta * ( MRoR - RFRate)

Where

• RFRate = risk free rate
• MRoR = market rate of return

RFR =

(

1 + Government Bond Rate

)

- 1

1 + Inflation Rate

RFR =

(

1 + 0.0447

)

- 1

1 + 0.022

RFR =

(

1.0447

)

- 1

1.022

RFR = 1.0222 - 1

= 0.022 or 2.2%

KE = 0.022 + 0.42(0.10 - 0.022)

= 0.022 + (0.42 * 0.078)

= 0.022 + 0.033

= 0.055 or 5.5%

1. You can use the beta from http://finance.yahoo.com. Type your ticker symbol for it.

PG: Beta 0.42

1. Use the MRP (market risk premium; E[Rm] - Rf) of 7% and the risk-free rate of 3%. If you have better estimates for MRP and Rf, you can use them with rational justifications. Keep in mind that the cost of capital calculated from the CAPM is an annual rate. You should divide that by 4 to match the interest rate and time period because you have quarterly CFs.

The formula:

= 1 / ( g)