Posted by Heidi on Tuesday, October 28, 2008 at 9:34pm.
K this is what I have so far. I am wondering if i did the CAPM right and if that is all i need for that part and then I need to know how to do the Constant Growth Model.
When you do yours, assume the risk-free return as 6%
Assume the expected market return 12%
The beta, dividend, and share price will come from the stock you select.
Assuming the following:
Risk-Free Return = 6%
Expected market return = 12%
Beta = - 0.22 %
Dividend = .95
Share price at the beginning of the period= $53.71
Find the share price at the end of the period for the given expected value.
First, calculate the expected return on the firm’s share from CAPM:
Expected return = Risk-free rate (1 – Beta) + Beta (Expected market value rate of Return)
= 0.06 (.95 – 0.22) + 0.22 (0.12)
= 0.0438 + 0.0264
= 0.702 would make it 7%
Then, calculate the ending price that supports and 7% expected return.
For calculating the ending price, apply the net rate of return formula as under:
Expected return = [(Expected ending price + Expected dividend) / Beginning price] - 1
.07 = [P (end) + .95/53.71] -1
1.02 = [P (end) + .95] / 53.71
53.71 x 1.02 = P (end) + .95
54.78 = P (end) + .95
54.78 - .95 = P (end)
P (end) = $53.83
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