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The ratio of the price of GM to next year's expected dividend (E[D1]) is 16. GM's beta is 1.5. The risk-free rate is 3.25%
The ratio of the price of GM to next year's expected dividend (E[D1]) is 16. GM's beta is 1.5. The risk-free rate is 3.25% and the market's risk premium is 6%. GM is a mature company, so assume a constant expected future growth rate. a) What growth rate is consistent with the current valuation of GM? b) If GM currently pays out 60% of its earnings as dividends (and plows back the rest), should it increase its dividends, decrease them, or keep them unchanged? c) According to your estimates, the expected growth rate of GM from the end of this year on is 7.5% forever. If your estimate is correct, what is the alpha of GM? Briefly explain your reasoning.
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