Question A2

Part I

iCloud is a young venture company specializing in cloud computing services. As with sales, dividends are expected to grow at an annual rate of 30, 20 and 15 percent for the next three years respectively. Afterwards, the dividend growth rate is expected to stabilize at a constant rate of 10 percent in the foreseeable future. Last week, the company just paid an annual dividend of $0.80 per share.

iClouds stock beta coefficient is 2.0. The risk-free rate is 7 percent and the expected rate of return on the market is 16 percent.

Required:

1. (a) What is the expected rate of return on iClouds stock based on CAPM?

2. (b) What is the stock value three years from now?

3. (c) What is the stock value today?

4. (d) What are the expected dividend yield and capital gain yield today?