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Computing A Stock's Return From Dividends and Appreciation

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Weyerhaeuser, the forest products producer, traded at $42 at the beginning of 1996. Beta services typically places its beta at 1.0 with a market risk premium of 6 percent. The risk free rate at the end of 1995 was 5.5 percent. The firm was expected to pay dividends of $1.60 per share in 1996 and 1997. Use CAPM to calculate the expected return, and at what price you expect Weyerhaeuser to sell at the end of 1997 if it does pay the dividends?

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Solution Preview

The Capital Asset Pricing Model states that the return on an investment is the sum of the risk-free rate and the product of the market risk premium (i.e., the premium over the risk-free rate investors will demand to invest in the "risky" stock market) and the investment's beta (i.e., relative ...

Solution Summary

This solution illustrates how to compute a stock's total return using the Capital Asset Pricing Model and how to allocate it between dividends and price appreciation.

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