FIN 260 Lecture 57: Constant Growth Model
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PLEASE SHOW ALL FORMULAS:
Facts: | |||||||
The Current risk free rate is | 10.0% | ||||||
Market is providing a return of | 15.0% | ||||||
Beta of | 1.30 | ||||||
Recent History of Dividends per share: | |||||||
Expect to pay dividend per share next year of | 3.18 | ||||||
Year | Dividend | ||||||
2015 | 2.94 | ||||||
2014 | 2.75 | Calculator | |||||
2013 | 2.48 | Input | Function | ||||
2012 | 2.36 | PV | |||||
2011 | 2.14 | FV | |||||
2010 | 2.00 | N | |||||
A) Calculate the constant growth rate: | |||||||
Average annual growth rate in percent | Solve for I | = | |||||
Do parts B, C and D, using the Capital Asset Pricing Model (CAPM): | |||||||
B) Determine the maximum cash price should pay for each share | |||||||
CAPM = | |||||||
P = D / (r - g) | P = D / (r - g) | $ - | |||||
D (Per Share Dividend) Expected | D (Dividend) = | ||||||
r (Required Return) | r (CAPM Rate) = | ||||||
g (Growth rate) | g (Growth rate) = | ||||||
C) Determine the effect on stock price if a 3% higher growth rate than shown in history. | |||||||
CAPM = | |||||||
P = D / (r - g) | P = D / (r - g) | $ - | |||||
D (Per Share Dividend) Expected | D (Dividend) = | ||||||
r (Required Return) | r (CAPM Rate) = | ||||||
g (Growth rate) | g (Growth rate) = | ||||||
D) If facts are same as B) above but Beta has changed to 1.0, determine max. cash price per share | |||||||
CAPM = | |||||||
P = D / (r - g) | P = D / (r - g) | $ - | |||||
D (Per Share Dividend) Expected | D (Dividend) = | ||||||
r (Required Return) | r (CAPM Rate) = | ||||||
g (Growth rate) | g (Growth rate) = |